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FLASH: Google Publishes Weird Letter to Announce 2 for 1 Stock Split

Introduction

Throughout our evolution, from privately held start-up to large, publicly listed company, we have managed Google for the long term—enjoying tremendous success as a result, especially since our IPO in 2004. Sergey and I hoped, though we did not expect, that Google would have such significant impact, and this progress has made us even more impatient to do important things that matter in the world. Our enduring love for Google comes from a strong desire to create technology products that enrich millions of people’s lives in deep and meaningful ways. To fulfill these dreams, we need to ensure that Google remains a successful, growing business that can generate significant returns for everyone involved.

Corporate Structure

When we went public, we created a dual-class voting structure. Our goal was to maintain the freedom to focus on the long term by ensuring that the management team, in particular Eric, Sergey and I, retained control over Google’s destiny. As we explained in our first founders’ letter:

“We are creating a corporate structure that is designed for stability over long time horizons. By investing in Google, you are placing an unusual long term bet on the team, especially Sergey and me, and on our innovative approach…

We want Google to become an important and significant institution. That takes time, stability and independence…

In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google. This structure will also make it easier for our management team to follow the long term, innovative approach emphasized earlier…

The main effect of this structure is likely to leave our team, especially Sergey and me, with increasingly significant control over the company’s decisions and fate, as Google shares change hands…

New investors will fully share in Google’s long term economic future but will have little ability to influence its strategic decisions through their voting rights…

Our colleagues will be able to trust that they themselves and their labors of hard work, love and creativity will be well cared for by a company focused on stability and the long term…

As an investor, you are placing a potentially risky long term bet on the team, especially Sergey and me. …. Sergey and I are committed to Google for the long term.”

I wanted to quote all that because these were the clear, well-publicized expectations we established for investors in 2004. While this decision was controversial at the time, we believe with hindsight it was absolutely the right thing to do. Eight years later, these statements are still remarkably accurate, and everyone involved has realized tremendous benefits as a result. Given Google’s success, it’s unsurprising that this type of dual-class governance structure is now somewhat standard among newer technology companies.

In our experience, success is more likely if you concentrate on the long term. Technology products often require significant investment over many years to fulfill their potential. For example, it took over three years just to ship our first Android handset, and then another three years on top of that before the operating system truly reached critical mass. These kinds of investments are not for the faint-hearted.

We have protected Google from outside pressures and the temptation to sacrifice future opportunities to meet short-term demands. Long-term product investments, like Chrome and YouTube, which now enjoy phenomenal usage, were made with a significant degree of independence.

We have a structure that prevents outside parties from taking over or unduly influencing our management decisions. However, day-to-day dilution from routine equity-based employee compensation and other possible dilution, such as stock-based acquisitions, will likely undermine this dual-class structure and our aspirations for Google over the very long term. We have put our hearts into Google and hope to do so for many more years to come. So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world.

Effectively a Stock Split: And a New Class of Stock

Today we announced plans to create a new class of non-voting capital stock, which will be listed on NASDAQ. These shares will be distributed via a stock dividend to all existing stockholders: the owner of each existing share will receive one new share of the non-voting stock, giving investors twice the number of shares they had before. It’s effectively a two-for-one stock split—something many of our investors have long asked us for. These non-voting shares will be available for corporate uses, like equity-based employee compensation, that might otherwise dilute our governance structure.

We recognize that some people, particularly those who opposed this structure at the start, won’t support this change—and we understand that other companies have been very successful with more traditional governance models. But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users. Having the flexibility to use stock without diluting our structure will help ensure we are set up for success for decades to come.

In November 2009, Sergey and I published plans to sell a modest percentage of our overall stock, ending in 2015. We are currently halfway through those plans and we don’t expect any changes to that, certainly not as the result of this new potential class. We both remain very much committed to Google for the long term.

It’s important to bear in mind that this proposal will only have an effect on governance over the very long term. In fact, there’s no particular urgency to make these changes now—we don’t have an unusually big acquisition planned, in case you were wondering. It’s just that since we know what we want to do, there’s no reason to delay the decision. Also note that there will be no immediate change in votes, because everyone will still have the same number. In addition, Eric, Sergey and I have all agreed to “stapling” arrangements so that, above set thresholds, if our economic interest in Google were to decline, our votes would as well. We also have provisions to ensure all shareholders are treated fairly from an economic perspective.

For more details on all of this, please see the postscript below from our Chief Legal Officer, David Drummond, and the preliminary proxy statement we will file with the SEC next week.

Conclusion

We have always managed Google for the long term, investing heavily in the big bets we hope will make a significant difference in the world. Some of these bets have been tremendous, funding our activities and generating significant gains for our shareholders. Others have been less successful. But the ability to take these kinds of risks has been crucial to Google’s overall success and we aim to maintain this pioneering culture going forward.

The proposal we announced today is consistent with the governance philosophy we articulated when we took the company public, as well as the trend for newer technology companies to adopt strong dual-class structures. We believe that it will provide great competitive strength—insulating Google from short-term pressures, whatever the source, for a long time to come, while also giving us more flexibility around equity grants.

Investors and others have always taken a big bet on us, the founders, and that bet will likely last longer as a result of these changes. We are honored that so many of you have put your trust in us and we recognize the tremendous responsibility that rests on our shoulders. We think this is a good thing because users rely on Google to produce and operate amazing technology products and to safely and responsibly store their data. This is our passion.

Sergey and I share a profound belief in the potential for technology to improve people’s lives and we are enormously excited about what lies ahead. I couldn’t write a better conclusion to this founder’s letter than what we wrote in 2004… so here goes: “We have a strong commitment to our users worldwide, their communities, the web sites in our network, our advertisers, our investors, and of course our employees. Sergey and I, and the team will do our best to make Google a long term success and the world a better place.”

Larry Page
GOOGApr 12 04:10PM
647.04
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+11.08

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+1.74%

Larry Page
CEO and Co-founder

Sergey BrinSergey Brin
Co-founder

April 2012

 

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Gas Prices Cut Into Convenience Store Profits

It has been touted that the recent rise in gas prices has not cut into consumer spending all that much. But if you don’t buy a coffee, candy bar, or newspaper how healthy can the consume be ?

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Fed’s Yellen: Easy Policy Appropriate Right Now

Source

“The Federal Reserve’s ultra-easy monetary policy is appropriate given high unemployment and the headwinds facing the economy, the No. 2 official of the U.S. central bank said on Wednesday, as she left the door open to further action if needed.

Janet Yellen, the Fed’s influential vice chair, said the economic outlook is particularly uncertain, as she highlighted concerns about unemployment. Still, overall, Yellen said she expects the economic recovery to continue and to strengthen somewhat over time.

She defended the central bank’s expectation that it will keep benchmark interest rates near zero through at least late 2014, but said guidance could shift in either direction depending on the economy’s performance.

“I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information,” Yellen said a speech to the Money Marketeers of New York University.

“In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming” than the central bank’s policy panel currently expects.

Yellen said while the labor market has shown signs of improvement, the economy remains far from full employment and the pace of economic growth is likely to be sufficient to lower joblessness only gradually.

While she doesn’t see evidence of a significant increase in structural unemployment – jobs that have permanently disappeared – so far, Yellen said she was concerned it could rise over time if the labor market heals too slowly.

“My concern is that individuals with such long unemployment spells could become less employable as their skills deteriorate and as they lose their connections to the labor market,” Yellen said.

The struggling housing sector, fiscal policy and the sluggish pace of economic growth abroad are all factors weighing on the outlook, Yellen said.”

 

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BoJ Says They Will Pursue Easing

“The yen weakened for a second day against the euro after Bank of Japan (8301) Governor Masaaki Shirakawa said policy makers will “pursue powerful easing” to help overcome deflation.

The dollar declined against the currencies of major U.S. trading partners after Federal Reserve Vice Chairman Janet Yellen said yesterday that U.S. borrowing costs will stay low, encouraging demand for riskier assets. Australia’s dollar rallied against all of its most-traded counterparts after employment increased more than economists forecast.

“The market is very focused on the BOJ and is pricing expectations that they do some more easing,” which is pressuring the yen, said Geoff Kendrick, head of European currency strategy at Nomura Holdings Inc. in London. “After the Australian data and the relatively dovish Yellen, there’s a bit of a positive mood.”

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Spanish and Italian Yields Take a Break; European Markets Rally on a Stronger Euro and ECB Comments

“European stocks rebounded from a two-month low and U.S. equity futures gained after Alcoa Inc. opened the earnings season with an unexpected profit. Spanish and Italian bonds climbed as governments sell about $50 billion of debt and the euro strengthened.

The Stoxx Europe 600 Index (SXXP) rose 0.9 percent as of 11:57 a.m. in London, while Standard & Poor’s 500 Index futures advanced 0.8 percent, signaling that stocks may gain for the first time in six days. Alcoa rose 6.3 percent in pre-market New York trading as aluminum climbed 0.9 percent from a three-month low. The euro snapped a five-day drop against the yen to strengthen 0.7 percent and Spanish debt risk neared a record.

European Central Bank Executive Board member Benoit Coeure suggested the lender could revive its debt-purchase program to reduce Spain’s borrowing costs after 10-year yields approached 6 percent. Italy and Germany were among six countries in Europe that sold debt today, while in the U.S., theFederal Reserve will release its Beige Book business survey.Alcoa (AA), the country’s largest aluminum producer, reported an unexpected first-quarter profit after orders rose.

“Fundamentally, the equity market offers extreme value and I am very happy to be buying on the dips,” said George Godber, who helps oversee $22 billion as a fund manager at Charles Stanley’s Matterley division in London. His Matterley Undervalued Assets Fund gained 12 percent in 2012. “Equities are the only place to be.”

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FLASH: S&P Futures +10

European stocks opened higher, reversing earlier indications of losses, sending US futs +10 above fair value on S&P.

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Could Low Volume Turn the Markets Into a Giant Pink Sheet ?

For sure we are a long way from seeing the market trade like some pump and dump penny stock; but some will argue with flash crashes and high frequency trading we are nearly there.

This article does not explore this angle but was food for thought on titling the post and wondering what if…

Source

“It’s one of the biggest mysteries on Wall Street. How can stocks be in their fourth year of a bull market and trading activity be so low?

NYSE trader
Getty Images

During March, average daily volume in equity shares was at their lowest level since December 2007, according to new data from Credit Suisse. This is the same month that marked the three-year anniversary of the bull market that caused the Standard & Poor’s 500 to double from its March 2009 credit-crisis low.

Credit Suisse tried to solve the riddle by blaming the growing popularity of options andfutures markets [cnbc explains] , a drop in high frequency trading and stock splits.

“There’s no way to sugar-coat it: Volumes are down and trending lower,” wrote Ana Avramovic of Credit Suisse, in a note to clients. “A growing preference for other asset classes may be drawing money away from equities.”

Daily equity volume in March was 6.59 billion shares a day, the lowest since a sub-6 billion volume month in December 2007, according to Credit Suisse. (The firm adjusted December 2011’s low figures to account for the holiday-skewed week.)

Avramovic noted that options and futures volume set a record in 2011, as investors hungry to add risk looked for a place where they could use leverage.

“The options market has been breaking records for nine straight years and the shift has been a growing field that provides protection and leverage,” said Pete Najarian, co-founder of TradeMonster.com, an options and equity brokerage.

 

S&P 500 Index

(.SPX)

1358.59     -23.61  (-1.71%%)
INDEX

 

The Credit Suisse analyst also notes that high-frequency trading, which accounts for half of all market activity, has been on the decline since last summer. What’s more, Citigroup[C  32.86    -1.11  (-3.27%)   ] alone accounted for 7 percent of all volume in the second half of 2009 before its 10 for 1 reverse split, according to the report.

But the answer may be simpler than this. After two vicious bear markets in a decade, the average investor simply doesn’t trust this market anymore.

“There is no fresh money going into the markets,” said Doug Kass of Seabreeze Partners. “Why should we be surprised the retail investor is not there? We’ve had two huge drawdowns in stocks since 2000, a flash crash two years ago and real incomes are stagnating.”

Stock mutual fund flows are negative on the year despite a double-digit percentage gain for the S&P 500 in 2012. Meanwhile, bond funds of all kinds keep garnering more assets, even with interest rates in the basement.

Some investors blame financial regulationfor the poor volume, saying it has restricted trading activity by the major banks. But others believe the banks — and their hand in causing the worst financial crisis since the Great Depression — are ultimately to blame.

“The financial industry has placed itself above the investing public (“muppets“) and will take every advantage it can secure,” said Alan Newman, author of the Crosscurrents financial newsletter. “The public’s confidence has been shattered, possibly beyond repair.”

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Finding the Next APPLE, $AAPL; $JPM Puts Out a List of 15 Possibles

“The 10-year return on Apple is  right around 5,000 percent.

That feeling you’re getting in your gut is regret.

You can’t take a time machine back to the ’90s and buy Apple.  But, you can invest in the stock that could become the next Apple.

“We have compiled a list of 15 ideas for companies that our analysts view as having secular growth opportunities, a strong market position, and attractive valuation, which make these equities attractive to own as the potential next ‘Apple,'” wrote JP Morgan’s Tom Lee in a recent note to clients.

“We compiled the quantitative and qualitative characteristics of AAPL.  Among them are: (i) products that inspire a following; (ii) reputational excellence; (iii) lifestyle products that focus on what one can do with their services/products; (iv) culture of success; and (v) prodigious growth offset by (vi) attractive valuations and (vii) ability to return capital.”

From Lee’s lengthy report, we pulled the key characteristics that make each of the 15 following companies something like Apple.

Source

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Study: Obama’s Health Care Law Would Raise Deficit

Source 

“WASHINGTON (AP) — Reigniting a debate about the bottom line for President Barack Obama’s health care law, a leading conservative economist estimates in a study to be released Tuesday that the overhaul will add at least $340 billion to the deficit, not reduce it.

Charles Blahous, who serves as public trustee overseeing Medicareand Social Security finances, also suggested that federal accounting practices have obscured the true fiscal impact of the legislation, the fate of which is now in the hands of the Supreme Court.

Officially, the health care law is still projected to help reduce government red ink. The Congressional Budget Office, the government’s nonpartisan fiscal umpire, said in an estimate last year that repealing the law actually would increase deficits by $210 billion from 2012 to 2021.

The CBO, however, has not updated that projection. If $210 billion sounds like a big cushion, it’s not. The government has recently been running annual deficits in the $1 trillion range.

The White house dismissed the study in a statement late Monday. Presidential assistant Jeanne Lambrew called the study “new math (that) fits the old pattern of mischaracterizations” about the health care law.

Blahous, in his 52-page analysis released by George Mason University’s Mercatus Center, said, “Taken as a whole, the enactment of the (health care law) has substantially worsened a dire federal fiscal outlook.

“The (law) both increases a federal commitment to health care spending that was already unsustainable under prior law and would exacerbate projected federal deficits relative to prior law,” Blahous said.

The law expands health insurance coverage to more than 30 million people now uninsured, paying for it with a mix of Medicare cuts and new taxes and fees.

Blahous cited a number of factors for his conclusion:

— The health care’s law deficit cushion has been reduced by more than $80 billion because of the administration’s decision not to move forward with a new long-term care insurance program that was part of the legislation. The Community Living Assistance Services and Supports program raised money in the short term, but would have turned into a fiscal drain over the years.

— The cost of health insurance subsidies for millions of low-income and middle-class uninsured people could turn out to be higher than forecast, particularly if employers scale back their own coverage.

— Various cost-control measures, including a tax on high-end insurance plans that doesn’t kick in until 2018, could deliver less than expected.

The decision to use Medicare cuts to finance the expansion of coverage for the uninsured will only make matters worse, Blahous said. The money from the Medicare savings will have been spent, and lawmakers will have to find additional cuts or revenues to forestall that program’s insolvency.

Under federal accounting rules, the Medicare cuts are also credited as savings to that program’s trust fund. But the CBO and Medicare’s own economic estimators already said the government can’t spend the same money twice.

Blahous served in the George W. Bush White House from 2001-2009, rising to deputy director of the National Economic Council. He currently is a senior research fellow at the Mercatus Center.

His study was first reported late Monday by The Washington Post.”

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Spanish Yields Climb to Nose Bleed Territory Despite Recent Budget Cuts

Spain’s efforts to calm investors with an additional 10 billion euros ($13 billion) of budget cuts in education and health failed to stem concerns the nation may be the fourth euro member to need a bailout.

The yield on Spain’s 10-year benchmark bond surged nearly 20 basis points to 5.94 percent today as Economy Minister Luis de Guindos declined to rule out a rescue for Spain and Bank of Spain Governor Miguel Angel Fernandez Ordonez said the nation’s lenders may need additional capital if the economy weakens more than expected…”

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U.S. Labor Pensions Under Funding Rises by 75% to Nearly $400 Billion

Source 

“The shortfall in US labor union pension funds is huge and growing rapidly. The latest data, from 2009, from the PBGC showed that thesemulti-employer plans were 48% underfunded with $331bn of assets to support $686bn of liabilities – and it has hardly been a good ride for those asset values since then. Critically, as the FT notes todayrecent changes by FASB has enabled Credit Suisse to estimate shortfalls more accurately and it paints an ugly picture. The critical difference between reality and what is being reported is the ability for firms to use actuarial ‘facts’ to discount liabilities or compound assets at a 7.5% annual growth rate – as opposed to the sad reality of a financially repressed investing environment where returns swing from +20% to -20% in a flash forcing all funds into market timers and not long-term buy-and-hold growth players. These multi-employer pension schemes cover over 10 million people concentrated in industries with highly unionized workforces such as construction, transport, retail and hospitality but of the shortfall only $43bn lies with firms of the S&P 500 – leaving the bulk of the burden on small- and medium-sized businesses once again. It seems the number and size of unfunded (implicitly government) liabilities continues to rise or does this force pensions to follow Ben’s path and increase exposure to hedge funds (which are underperforming in this serene rally so far this year) in an effort to meet these hurdle rates? Either way it appears this under-appreciated drag on the real-economy as one after another small-, medium-, and large- (Safeway faces shortfalls larger than its market cap) businesses will need to eat into earnings to fund this shortfall.

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Banks Test CDO Market for Investor Appetite

“Some of the world’s biggest banks are trying to extend the principles of securitization to the plain-vanilla world of trade finance – a market worth an estimated $10 trillion a year – as concern mounts that regulatory changes could constrain a key lubricant of the global economy.

Trade

JPMorgan [JPM  43.65    -0.69  (-1.56%)   ] is among several banks that have begun testing investor appetite for the trade finance equivalent of collateralised debt obligations – the derivative products blamed for compounding the financial crisis – in an attempt to boost lending capacity.

Trade finance supports more than 80 percent of global trade. But it has been disrupted by the financial crisis, as some lenders got into trouble, and by the regulatory response to the crisis, as banks have been ordered to hold more capital against lending.

Banks have lobbied hard against the constraints imposed on trade finance by the Basel III global rule book, due to be phased in from 2013.

The new rules for overall bank borrowing – the leverage ratio – treat a typical three-month trade finance loan as a year-long exposure, effectively forcing banks to hold far more top-quality capital against the loan….”

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Hedge Funds Reduce Commodity Bets for a Second Week

Hedge funds reduced bullish bets on commodities for a second consecutive week as theFederal Reserve signaled it may refrain from more monetary stimulus, increasing concern that growth will slow and curb demand for raw materials.

Money managers lowered net-long positions across 18 U.S. futures and options by 2.8 percent to 1.1 million contracts in the week ended April 3, data from the Commodity Futures Trading Commission show. Bets on higher corn prices fell to the lowest since February, while those on hogs dropped by the most since May. Speculators cut wagers on costlier crude oil for a third week, and are now the least bullish in two months.

Minutes from the March 13 Fed policy meeting released April 3 showed policy makers will probably hold off on increasing monetary accommodation unless the U.S. economic expansion falters. The Standard & Poor’s GSCI gauge of 24 commodities rose more than 80 percent from December 2008 to June 2011 as the central bank set rates at a record low and bought $2.3 trillion of debt in two rounds of quantitative easing. The U.S. economy will accelerate this quarter and the next, economist estimates compiled by Bloomberg show.

“The market is addicted to stimulus,” said Jeffrey Sica, the Morristown, New Jersey-based president of SICA Wealth Management who helps oversee $1 billion of assets. “This market has risen because of the liquidity push and the market will decline when it’s deprived of liquidity.”

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Russia Leaves Rates Unchanged @ 8% Sighting Medium Term Inflation Risks

Russia’s central bank refrained from cutting interest rates for a fourth month after signaling that “medium-term” inflation risks are increasing.

Bank Rossii left the refinancing rate at 8 percent, as predicted by 21 of 22 economists in a Bloomberg News survey. The overnight auction-based repurchase rate was kept at 5.25 percent and the overnight deposit rate will remain at 4 percent.

The world’s largest energy exporter is keeping borrowing costs unchanged even after the inflation rate fell to the lowest in two decades. Current market interest rates are “acceptable for the coming months,” Bank Rossii said. China may ease policy to boost faltering growth andBrazil has cut its benchmark rate five times since August.

“Medium-term inflation risks are rising because of uncertainty over the impact on consumer prices of the planned increase in most of the regulated prices and tariffs in July,” the central bank said in the statement.

Consumer prices rose 3.7 percent from year earlier in March and core inflation, which excludes volatile costs such as energy, decelerated to 5.5 percent, the regulator said today.

Russia’s benchmark 30-stock Micex Index reversed gains, dropping 0.4 percent to 1,491.45 in Moscow after the announcement. The gauge had risen as much as 0.6 percent before the decision. The ruble remained little changed at 29.63 against the dollar and was steady at 38.7080 versus the euro….”

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Revving Inflation in China Kills Hopes of Dovish Action

China’s inflation accelerated more than forecast in March on a pickup in food prices, signaling that policy makers may exercise caution in adding stimulus to boost growth.

Consumer prices rose 3.6 percent from a year earlier, the National Bureau of Statistics said today. That was more than the median 3.4 percent estimate in a Bloomberg News survey of 33 economists. Food-related costs gained 7.5 percent.

Premier Wen Jiabao’s officials may need to remain alert to the risk of inflation bouncing back even after price increases stayed below the government’s 4 percent target for a second month.China’s economy may have expanded last quarter at the slowest pace in almost three years, showing the limits of the nation’s contribution to global growth as U.S. job growth weakens and concern mounts about Europe’s sovereign-debt crisis.

“The upside surprise in today’s CPI reading is likely to raise concerns about a possible rebound in inflationary pressures among policy makers,” said Song Yu, a Beijing-based economist with Goldman Sachs Group Inc. “The data could limit the magnitude of the policy loosening that likely started in March,” Song said, citing Goldman’s observations on the increasing supply of loans and news reports on the government easing restrictions on banks’ lending capacity…”

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