“Great fortunes are built on the proper use of credit. Improper use of credit leads to mal-investment and wealth destruction.

We cannot understand our fundamental financial problems if we do not understand the proper use of credit. Credit has a key role in capitalism; credit-starved economies are underdeveloped economies, as economist Hernando De Soto explained in his masterwork, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

In the chronically underdeveloped economies De Soto describes, households have assets–land, dwellings, small businesses–but since the assets do not have legally recognized status as “property” (because the system for recognizing and registering property is both cumbersome and corrupt), they cannot act as collateral for borrowed capital, i.e. loans.

As a result, the majority of the assets are “dead capital,” difficult to sell, pass on to future generations or use as collateral.

Great fortunes are built on the proper use of credit. The borrower needs capital to expand his/her enterprise, and the lender needs a fast-growing enterprise with collateral and an income stream to support a low-risk, high-yield loan.

We can profitably look to Colonial America as an example of a credit-starved economy. In the wake of the Revolutionary war and the ratification of the Constitution (1789), the U.S. financial system was a mess: debts left by the war burdened the new government, which historian Thomas McCaw noted “started on a shoestring and almost immediately went bankrupt.”

Differing views on the role of the central government, central bank and credit splintered the political elite, with Hamilton squaring off against Madison and Jefferson (though Madison’s views were by no means identical to Jefferson’s).

Meanwhile, in the real economy, ordinary farmers and entrepreneurs were desperate for long-term credit to fuel their rapidly growing enterprises. Though states were banned by the Constitution from issuing their own currency, states got around this prohibition by granting bank charters. The banks promptly issued the credit that an entrepreneurial economy needed.

The political elite, regardless of their differences, were appalled by this explosion of privately issued and essentially unregulated credit, but this access to credit–turning “dead capital” into collateral–fueled the astonishing growth of the U.S. economy in the 1790s and early 1800s.

The American economy in this phase was anything but orderly or well-regulated. Wild and risky better describe the financial and commercial chaos of the era, but this untamed capitalism led to more successes than failures, and the bankrupt enterprises and busted banks were absorbed by the fast growth of the real economy.

This chaotic explosion of credit and entrepreneurial drive was the opposite of central planning. Risk was everywhere; security in today’s meaning did not exist….”

Full article

“Although the mega-rich and influential often use complex offshore havens to hide assets, own yachts and art masterpieces and avoid taxes — often with the help of some of the world’s biggest banks — but lower-income individuals also use offshore accounts, a new study from the Washington, D.C.-based International Consortium of Investigative Journalists (ICIJ) reveals.

The ICIJ, in conjunction with a group of investigative journalists, cataloged a smorgasbord of shady dealings by the wealthy and others — including government officials — in an exhaustive 15-month investigation.

In all, 86 journalists from 46 nations used high-tech data to sift through millions of leaked documents going back decades.

Caught up in the net of the tax shelters are American doctors and dentists, Wall Street swindlers, Russian executives, international arms dealers and families of despots, among others.

“We already knew how secret and inaccessible the offshore industry is, but we were surprised by now vast and far-reaching it is,” said Gerard Ryle, director of the ICIJ.

“We expected to find only the mega rich using [offshore accounts],” he told CNNMoney. “But in fact we found it was being used by a much broader section of society.”

The exhaustive effort “sheds new light on the methods used to deceive fiscal authorities and hide money,” German magazine Spiegel stated.

According to CNNMoney, the hidden accounts included proceeds from Ponzi schemes and money drained from nations’ coffers, with the cross-border proceeds as high as $1.6 trillion annually.

“I’ve never seen anything like this. This secret world has finally been revealed,” Arthur Cockfield, a law professor at Queen’s University, told the Canadian Broadcasting Corporation.

The ICIJ said about 130,000 people were identified in the documents, many from unnamed sources believed to include banking industry informants….”

Full article

“If there is such a thing as conventional wisdom in investing, which may be doubtful, one often touted rule is to avoid low-priced stocks. The most common reason given for this advice is often that they are low-priced for a reason. Fair enough, but it is important for investors to remember that at one time smartphone and tablet giant Apple Inc. (NASDAQ: AAPL) was a single-digit priced stock. Investors who bought Apple at the bottom made a tremendous amount of money.

Another reason cited by some trading pundits is that low-priced stocks, especially those under $5, are not marginable. Again, a true statement. Investors looking to get leverage on stocks have a built-in advantage with low-priced names. They already are priced low, so more shares can be bought and require less capital than high-priced stocks. In addition, many low-priced shares have options traded on the underlying shares. Investors can always seek leverage via the option markets.

We looked through our research database for solid names that not only had good stories, but had Wall St. coverage. Typically the last thing large bulge bracket firms, or any firm for that matter, wants to do is pitch a low-priced name that gets crushed. Here are the names we found that investors may want to consider….”

Full article

“The Russians are taking a page from the Europeans book (and not a positive one for libertarians). Given the substantial criminal activity and illegal entrepreneurship in Russia – the grey and black economies account for 50–65 percent of GDP and estimates that about $50 billion was taken out of Russia illegally in 2012 alone – the great and glorious leaders have decided to impose restrictions on cash transactions. As Russia Beyond The Headlines reports, Russia may ban cash payments for purchases of more than 300,000 rubles (around $10,000) starting in 2015 – starting with a higher ($19,500) restriction in 2014. They will also enforce mandatory cash-free salary payments (cash compensation accounts for 15% of GDP currently) in an effort to both bring some of the population’s ‘grey’ income out of the shadow; and increase the volume of cash reserves in the banks. It would appear that wherever we look now, leadership are realizing that the limits of fiscal and monetary policy have been reached and now changing rules, limiting freedom, and outright confiscation are the only way to maintain a status quo. Ironic really, when the enforcement of said rules may just be the catalyst for the end of the status quo as the middle class suffers….”

Full article

“MILAN/MADRID (Reuters) – Small companies struggling to repay loans in Italy and Spain signal bigger problems on the horizon for the euro zone after the dust has settled on Cyprus’s last-ditch bailout this week.

Defaults by small and medium-sized enterprises (SMEs), easily the biggest employers in Spain and Italy, are rising at a worrying clip, spelling trouble for the banks and two countries at the heart of Europe’s debt crisis.

“You can be sure that if these companies’ bad debts rise, you’re going to see more bad loans to families, and credit card bills that won’t be paid,” said Javier Santoma, finance professor at Spain’s IESE business school.

The ability of Italy and Spain, which account for 28 percent of the euro zone economy compared with Cyprus’s 0.2 percent, to pull themselves out of crisis and avoid full-blown bailouts depends on the health of their banks; weak banks conserve capital rather than lend to get the economy moving.

Profits at Spain’s top three lenders Santander , BBVA and Caixabank fell an average 60 percent in 2012 due to steep government-enforced provisions for property losses. Writedowns of nearly 24 billion euros at state-owned Bankia led to a record 19.2 billion euro loss.

In Italy, the two biggest banks, Intesa Sanpaolo and UniCredit , set aside a combined 14 billion euros in 2012 to cover bad loans. Smaller lenders also had to increase provisions after the central bank conducted simultaneous audits of around 20 institutions.

Banco Popolare , Italy’s fourth biggest, issued a profit warning after the audit prompted 684 million euros of loan loss provisions in the fourth quarter, more than the total it set aside in the first nine months of the year.

PROVISIONS…”

Full article

“U.K. banks including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc (LLOY)may avoid the need to sell new shares to bolster their balance sheets after the Bank of Englandused more lenient rules than those advocated by European regulators.

Lenders were yesterday told they need to raise 25 billion pounds ($38 billion) of additional capital, of which they have already laid out plans to cover about half. By targeting a core Tier 1 capital ratio of 7 percent by the end of 2013, rather than the 10 percent by 2019 required by theBasel Committee on Banking Supervision, firms don’t need to raise as much. Government-owned RBS and Lloyds have already sold assets to help bolster their balance sheets.

“They’ve chosen a core Tier 1 ratio that’s quite generous,” said Gary Greenwood, an analyst at Shore Capital Ltd. in Liverpool,England. “The problem is they still need the banks to lend, and the U.K. government doesn’t want to put more money in. If these were all still shareholder-owned businesses they’d be told to have rights offers.”

Britain’s lenders have been selling units and detailing plans to bolster their businesses since the central bank said in November it was concerned they hadn’t fully recognized future loan losses and may be using inappropriate risk models to assess how much capital they hold. BOE Governor Mervyn King said the shortfall “is not an immediate threat to the banking system” and won’t require additional government investment in banks. RBS and Lloyds received a total of about 65.5 billion pounds of taxpayer aid during 2008 and 2009.

Ratio Lowered…”

Full article

“Chinese bank shares tumbled in Shanghai and Hong Kong after the banking regulator tightened rules on wealth-management products and the cabinet called for new measures to deregulate interest rates.

China Citic Bank Corp. (998) fell 6.8 percent to 4.91 yuan as of 1:21 p.m. in Shanghai after dropping by its 10 percent daily limit, and lost 4.7 percent in Hong Kong. China Minsheng Banking Corp. (600016) dropped 7.9 percent in Shanghai and Huaxia Bank Co., which faced customer protests in December, plunged by as much as 10 percent.

The regulator told banks to limit investments of client funds in credit assets that aren’t publicly traded, and to isolate the risks from their operations. Wealth management products increased 56 percent to 7.1 trillion yuan ($1.1 trillion) last year, equivalent to 7.6 percent of total deposits, according to Standard & Poor’s, prompting warnings from regulators and ratings firms that credit risks are rising.

“This is so far the harshest and most concrete tightening measures regarding WMPs,” Yao Wei, Hong Kong-basedChina economist at Societe Generale SA, said in a note. “However, the immediate impact should be manageable to banks, as the banking regulator has been communicating with the major banks about (potential) rule changes for some time.”

Customer Retention..”

Full article

“South Korea announced it will unveil a stimulus package in April to spur the property market and revive the economy after cutting its growth forecast for the second time in four months.

A supplementary budget and details of the measures to encourage property sales will be released over time, the Finance Ministry said in a statement in Sejong today. The economy will expand 2.3 percent this year, down from a 3 percent growth forecast made in December, it said.

The new forecast is more pessimistic than the central bank’s outlook for 2.8 percent growth and compounds concern that expansion in Asia’s fourth-largest economy will stall after slowing to the weakest in three years. Facing a stagnant property market and weaker yen, the Bank of Korea may come under pressure to lower the benchmark interest rate next month.

“This is a major cut, and marks a shift from a government that prioritized fiscal soundness to one that takes a more realistic view of the economy that needs a policy boost,” Lee Chul Hee, a Seoul-based economist at Tongyang Securities Inc. (003470), said by phone today. “The Bank of Korea will need to make a strong case that the economic recovery is on track not to make the interest-rate cut in April.”

Today’s revision was the second time the government has lowered its growth forecast since President Park Geun Hye was elected in December. The new forecast doesn’t factor in the coming stimulus package, Choi Sang Mok, a director general at the Finance Ministry, told reporters today.

Bonds Rise….”

Full article

“Tax revenues of U.S. state and local governments grew for the 13th quarter in a row at the end of 2012, rising 2.7 percent from the fourth quarter of 2011, according to Census data released on Tuesday.

Tax revenue totaled $399.7 billion, compared with $389.1 billion in the fourth quarter of 2011. For states alone, the increase was sharper. Their total tax revenue grew 4.9 percent to $193.9 billion in the final quarter of 2012.

The fourth-quarter growth, however, could indicate that revenue will drop or only increase mildly in the first quarter of 2013.

Because tax cuts passed under former President George W. Bush were set to expire at the end of 2012, many taxpayers sold off investments or made other financial moves in the waning days of the year to avoid potentially steep tax bills in 2013. The burst of income affected states, as individual income taxes provide more than one-third of total state tax revenue.

State and local individual income tax revenue shot up 9.4 percent in the fourth quarter from the final quarter of 2011 to$75.7 billion, according to the Census.

Of the states that levy individual income taxes, California brought in the highest amount, $14.28 billion, followed by New York’s $8.42 billion, and Illinois with $3.43 billion….”

Full article

“U.K. lenders were told by the Bank of England to raise 25 billion pounds ($38 billion) of additional capital, less than analyst estimates.

Banks need to set aside more money to cover bigger potential losses on commercial real estate and from the euro area, possible fines for mis-selling and stricter risk models, the Bank of England said following a report by the Financial Services Authority. The BOE didn’t identify or quantify the number of lenders that need to bolster capital and it said plans already announced by banks should cover about half the shortage.

“It’s a bit of a damp squib,” said Simon Maughan, an analyst at Olivetree Securities Ltd. in London. “The banks are going to have until the end of 2013, at least, to do it and there was no change to the message that they won’t need to raise fresh capital or restrict dividend payments.”

The BOE is pushing banks to increase resilience so they can boost lending and fund an economic recovery. The bank’s focus on loan losses could still hit Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc (LLOY) the most because of their commercial real-estate holdings, whileBarclays Plc (BARC), with its investment banking unit, would be most affected by the changes to risk weights, Maughan said. RBS and Lloyds have announced asset sales this year to bolster capital, and Barclays plans to sell contingent convertible notes.

Loan Losses…”

Full article

“China’s largest banks posted a decline in bad-loan ratios for 2012 amid the slowest economic expansion in 13 years, signaling policy makers may have averted a surge in defaults.

The gauge shrank to 1.33 percent at Agricultural Bank of China Ltd., the nation’s third-largest by market value, from 1.55 percent in 2011, while net income increased by 19 percent, the Beijing-based lender said yesterday. At Bank of China Ltd., the fourth-largest, non-performing loans dropped to 0.95 percent of the total from 1 percent, and profit climbed 12 percent…”

Full article

Source

“Reuters) – Regulators approved on Monday a plan to compensate market makers who lost money in a botched Facebook Inc public offering on Nasdaq OMX Group Inc’s Nasdaq exchange.

The decision from the Securities and Exchange Commission was in response to a series of high-profile glitches last year that shook the market, including the handling of Facebook’s long-anticipated initial public offering on May 18, 2012.”

Full article

“Bank of England Governor Mervyn King was defeated for a second month in a vote to expand stimulus as the majority of policy makers said more bond purchases may erode their credibility and push the pound lower.

The Monetary Policy Committee voted 6-3 to keep the target for buying at 375 billion pounds ($566 billion), the central bank said in minutes of its March 7 meeting, published in Londontoday. King, David Miles and Paul Fisher wanted a 25 billion- pound increase, repeating their push from February. A separate report showed unemployment rose for the first time in a year….”

Full article

“We were waiting for the ECB response, and seconds ago we got it, when the ECB uttered the magic words, saying it would provide “liquidity within existing rules.” What this means is unclear, but the algos loved it and sent the EURUSD up over 50 pips higher in milliseconds. What the algos apparently don’t get is that this does not account for the additional liquidity needed that would only be released if Cyprus passed the bailout vote. The last thing the ECB wants is to appear weak, and fold letting every other broke deadbeat country to demand the same equitable treatment and diluting Germany’s political might. For now however, the is a move to be faded….”

Full article

“China’s foreign direct investment rose for the first time in nine months in February, a sign confidence in the world’s second-biggest economy is improving amid optimism growth will keep rebounding.

Inbound investment gained 6.3 percent from a year earlier to $8.21 billion, the Ministry of Commerce said in a statement today in Beijing. Non-financial outbound investment in the first two months of the year surged 147 percent to $18.4 billion, exceeding inbound spending of $17.5 billion.

Newly appointed Premier Li Keqiang’s pledge to spread the wealth from the nation’s economic expansion and increase the number of middle-income citizens may support government efforts to rely more on domestic demand for expansion. Li vowed to open the economy to more market forces and strip power from the government to achieve 7.5 percent annual growth through 2020.

“China’s attractiveness remain for foreign investors, from its relatively-developed infrastructure to stable macroeconomic growth,” said Sun Junwei, a Beijing-based economist with HSBC Holdings Plc. “As the global economy recovers, China may continue to see a steady inflow of investments this year, helping the overall China recovery story.”

The benchmark Shanghai Composite Index (SHCOMP) rose 0.1 percent as of 11:04 a.m. local time. China’s money-market rate dropped to the lowest level in more than a week on speculation increased investment from abroad will boost cash in the financial system.

Global Economy

Data today on investor sentiment in Germany, industrial production in Italy and U.S. housing starts will be among the latest readings on the strength of the global economy as European officials seek to contain a financial crisis in Cyprus….”

Full article

“Chancellor of the Exchequer George Osborne promised another austere budget and policies designed to mute calls for a fiscal stimulus for the U.K. economy.

Osborne said the pressures facing Cyprus are a reminder of what financial markets will do to nations that fail to act and suggested that he will resist calls in the March 20 annual budget to borrow money to fund giveaways. Instead, he promised measures to help the British retirees, military and diplomatic staff in Cyprus who are affected by the tax on bank deposits dictated by the island’s bailout, and he said he’d support plans to stimulate economic growth in Britain’s regions.

“There is no easy answer, there is no miracle cure,” Osborne, 41, told BBC1 Television inLondon yesterday. “We have to go on confronting the very difficult economic problems.”

Calls for greater action to aid growth from both his Conservative Party and the Liberal Democrats in the coalition government have subsided in recent days, suggesting Osborne’s budget will include measures to appease cabinet critics such as Business Secretary Vince Cable. Osborne will have to fund such actions with cuts elsewhere to stay the course on austerity.

The opposition Labour Party repeated its call for Osborne to cut value-added tax, reduceNational Insurance (ANAT) contributions for small companies and reintroduce the 10 percent starting rate of income tax. The party’s Treasury spokesman, lawmaker Ed Balls, suggested he would back an income-tax cut.

“If he wants to cut the basic rate, we will support him in that,” Balls told the same BBC program yesterday.

Cable’s Demands…”

Full article

“Euro-area finance ministers agreed to extend maturities on rescue loans to Ireland andPortugal, easing the terms on two recipients of European bailout aid in a show of support for their commitment to austerity.

The ministers gave no details on the extension. Those will be worked out by the so-called troika that oversees euro-area bailouts and the European Financial Stability Facility, the currency bloc’s temporary rescue fund, the finance chiefs said today. The details will be presented to euro ministers at the same time as the memorandum of understanding underlying a rescue program for Cyprus….”

Full article

“Euro-area finance ministers agreed to an unprecedented tax on Cypriot bank deposits as officials unveiled a 10 billion-euro ($13 billion) rescue plan for the country, the fifth sinceEurope’s debt crisis broke out in 2009.

Cyprus will impose a levy of 6.75 percent on deposits of less than 100,000 euros — the ceiling for European Union account insurance — and 9.9 percent above that. The measures will raise 5.8 billion euros, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, told reporters early today after 10 hours of talks in Brussels. The euro region’s bailout kitty and, possibly, the International Monetary Fund will look to make up the shortfall. A partial “bail-in” of junior bondholders is also possible.

Officials have struggled to find an agreement that would rescue Cyprus, which accounts for just half of a percent of the euro region’s economy, without unsettling investors in larger countries and sparking a new round of market contagion. Policy makers began meeting at 5 p.m. yesterday in a hastily convened gathering, seeking to overcome differences on bondholder losses while financial markets were closed.

Bank Runs

“Further measures concern the increase of the withholding tax on capital income, a restructuring and recapitalisation of banks, an increase of the statutory corporate income tax rate and a bail-in of junior bondholders,” according to a communique released by ministers after the talks. It didn’t specify whether bank or sovereign bond holders could be affected.

The European Central Bank will use its existing facilities to make funds available to Cypriot banks as needed to counter potential bank runs. Depositors will receive bank equity as compensation….”

Full article

“International purchases of U.S. stocks, bonds and other financial assets rose less than forecast in January as confidence grew that Europe was emerging from its debt crisis.

Net buying of long-term financial assets totaled $25.7 billion during the month, down from net purchases of $64.2 billion in December, the Treasury Department said today in Washington. Economists surveyed by Bloomberg projected net buying of $40 billion of long-term assets, according to the median estimate.

“The need for a safe haven is slightly reduced as the euro debt crisis is no longer dragging down the world markets, but the U.S. is winning the economic growth race among developed nations and this is attracting capital,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report was released….”

Full article

“The Federal Reserve Thursday dealt a blow to J.P. Morgan Chase JPM +1.65% & Co. and Goldman Sachs Group Inc., GS +1.37% citing weaknesses in their “stress test” capital planning that could hamper their funneling more dividends and share buybacks to investors.

The central bank also denied capital plans submitted by BB&T Corp.BBT +0.50% and Ally Financial Inc. But the Fed at the same time cleared 14 other banks to boost payouts to shareholders, including Citigroup Inc.C +1.03% and Bank of America Corp.,BAC +0.41% both of which in past years had capital requests rejected by the central bank.

The Fed also approved a reduced repurchase plan from American Express Co., AXP +0.12% in the only instance of a bank winning approval for a plan resubmitted to the regulator under a new stress-test wrinkle this year.

The Fed said the results show the banking system has grown stronger since the financial crisis, in large part because banks and securities firms are paying out less than they did before the 2008 meltdown.

The actions underscore the government’s increased role in the banking sector since the financial crisis. Regulators over the last few years have pushed banks to build up capital buffers and improve risk management to more realistically account for potential losses.

“The financial crisis showed not only that regulators needed to increase capital requirements and conduct regular tests, but also that firms need strong internal processes to evaluate their own capital needs based on their individual risks and circumstances,” Fed governor Daniel Tarullo said in a statement….”

Full article