Wednesday, February 26, 2014 - Inequality With a Dash of Salt

Inequality With a Dash of Salt

by Sinclair Noe

DOW + 18 = 16,198
SPX + .04 = 1845
NAS + 4 = 4292
10 YR YLD - .03 = 2.67%
OIL +72 = 102.55
GOLD – 11.80 = 1330.80
SILV - .68 = 21.32

Sales of new single-family homes started 2014 with surprising strength, with January posting the fastest pace in more than five years. Home sales jumped 9.6% in January to a seasonally adjusted annual rate of 468,000, hitting the highest level since July 2008. Today’s sales news follows a string of recent reports signaling recent sputtering in the housing market. The data, to be fair, have a huge confidence interval—plus or minus 17.9% in January. That means we can’t know for certain whether sales rose or fell during the month. On a three-month average, sales rose 1.2% in January. Sometimes you have to take a look at economic data with a dash of salt.

Bank earnings jumped in the fourth quarter, but not solely because of increased net income. According to the Federal Deposit Insurance Corporation, financial institutions in the US earned a whopping $40.3 billion in net income in the fourth quarter of 2013, up 16.9% from a year earlier. More than half of the 6,812 FDIC insured institutions reported a year-over-year growth in quarterly earnings. And the portion of unprofitable banks dropped to 12.2% from 15% in the fourth quarter of 2012.

But it’s not all good news. The improvement in earnings was largely attributable to an $8 billion decline in loan-loss provisions, which is a way banks can boost the bottom line by fudging the numbers. Revenue was lower year-over-year due to slowing mortgage activity and a drop in trading throughout the industry. Mortgage activity fell 62% in the fourth quarter compared to the same period the year before for one- to four-family homes, as rising interest rates in the first half of 2013 reduced the demand for mortgage refinancings. Net Income for the full year in 2013 was up 9.6% to $154.7 billion, compared to 2012.

The Senate Permanent Subcommittee on Investigation, or PSI, has issued its report on offshore tax avoidance; the report would make Robert Ludlum flinch; it’s full of implausible cloak and dagger schemes that could never pass muster in a quality spy novel. Truth is stranger than fiction, but it is because fiction is obliged to stick to possibilities; so said Mark Twain.

The co-authors of the tax avoidance story were Senators Carl Levin and John McCain. For more than 6 years, US officials have been investigating how Americans dodged taxes by hiding assets in secret Swiss bank accounts. At a press briefing, McCain said offshore tax practices operated by Credit Suisse and other institutions had cost US taxpayers $337 billion in potential revenue, which he called “the largest amount of tax revenue lost due to evasion in the world.” He said Credit Suisse, Switzerland’s second largest bank, had “greatly profited from this infamous business model”.

According to Senator Levin, Credit Suisse’s US office used a series of intermediaries to set up a series of offshore shell companies for US clients “in order to hide their assets”. Large sums were divided into smaller ones before they were sent to the US so as not to trigger investigations by US tax authorities. The Credit Suisse crowd also set up phony visa applications to disguise their travels to meet clients. And when they did meet clients, they played the spy game, complete with clandestine exchanges of bank statements, and smuggling cash. In other words, all the actors knew they were doing something that should not be exposed to the light of day.

An investigation into similar practices at UBS, Switzerland’s biggest bank, ultimately led to the recovery of $6 billion in undeclared taxes from US customers, but investigations into the tax schemes had been hampered by the Swiss government. Instead of turning over the names of US taxpayers who have Swiss accounts like UBS did, the Swiss government has delayed requests for assistance and prevented banks from turning over information in an effort to close the door on past conduct.

According to the PSI report the tax avoidance schemes went on from at least 2001 to 2008. Over the past five years the Justice Department has obtained information, including US client names, for only 238 undeclared Swiss accounts out of the tens of thousands opened offshore. Two top Justice Officials told the subcommittee "the department is committed to global enforcement against financial institutions that engage in or facilitate cross-border tax evasion." So far that commitment has seen the Justice Department file tax-evasion related charges against 73 account holders and 35 bankers and advisors since 2009.

An investigation into Credit Suisse resulted in a deal last week between the Swiss bank and the Securities and Exchange Commission. Credit Suisse agreed to pay $197 million for servicing US clients without approval; that means the bankers traveled to the US and met with US clients - maybe 8,500 clients - and advised those clients on how to evade taxes, but they didn’t register as financial advisors. The agreement left unsettled a criminal probe into Credit Suisse and others over whether they helped Americans evade taxes. About 1,800 Credit Suisse staff worked on the accounts, but only 10 people have been disciplined and none had been fired.

McCain said: “This fine pales in comparison to the full range of wrongdoing perpetrated by the bank and its unwillingness to take responsibility for its actions immediately.”

The Credit Suisse chief executive, Brady Dougan, told the senators that he was blocked by Swiss law from disclosing the names to the US authorities. The bank's general counsel, said: "We would all face criminal indictments and possibly prison terms if we were to hand over these client names."

Dougan testified before the senators: "To our deep regret, it is also clear that some Swiss-based bankers at Credit Suisse appear to have helped their US clients hide income and assets in the past… Although it was not and is not illegal for Swiss banks to accept deposits from Americans, it is absolutely unacceptable for Swiss-based bankers to help US taxpayers evade taxes or to provide them with securities advice in the US without being properly licensed."

That doesn’t exactly sound like remorse for tax evasion, as much as annoyance for not having the licenses in order.

So, now the question is what will be done. The senators said the Justice Department had decided to tackle the issue by filing treaty requests, with little success. McCain said he would be quizzing Justice Department officials about why they had not made more progress. Years and years of illegal activity; a 178 page report detailing the wrongdoing; and this on top of repeated offenses from banks that have resulted in slap-on-the-wrist fines and DPA’s, deferred prosecution agreements – which is basically an agreement that says if you break the law again you actually get punished. And the result is the banks never get punished. They break the law with impunity. This tax evasion is stealing, plain and simple.

Meanwhile the International Monetary Fund has released a new study on income inequality, and the takeaway is that income inequality can lead to slower or less sustainable economic growth, while redistribution of income, when measured, does not hurt and can even help an economy.

The IMF has traditionally advised countries to promote growth and reduce debt, but has not explicitly focused on income inequalities. In the past year, IMF Managing Director Christine Lagarde has said that creating economic stability is impossible without also addressing inequality.

According to the study: "It would still be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable."

The IMF report said countries with high levels of inequality suffered lower growth than nations that distributed incomes more evenly. It warned that inequality can also make growth more volatile and create the unstable conditions for a sudden slowdown in GDP growth.

The new study comes after several years of heated debate over the path that developed and developing countries' economies have taken since the financial crash and whether their recoveries are sustainable. Anti-poverty charity Oxfam welcomed the report, saying it shows "extreme inequality is damaging not only because it is morally unacceptable, but it's bad economics".

It added: "The IMF has debunked the old myth that redistribution is bad for growth and demolished the case for austerity. That redistribution efforts -essential to fight inequality- are good for growth is a welcome finding. Low tax and low public spending are clearly not the route to prosperity."

"We find that inequality is bad for growth ... in and of itself, and we can say that redistribution by itself doesn't seem to be bad for growth, unless it's very large."

They said the traditional view that efforts to redistribute incomes would have a corresponding and most likely detrimental effect on growth was unfounded.

"Rather than a trade-off, the average result across the sample is a win-win situation, in which redistribution has an overall pro-growth effect, counting both potential negative direct effects and positive effects of the resulting lower inequality."