Investors flee from equities worldwide

Retail investors worldwide pulled over $28bn (€19bn) from equity funds last week, fleeing for the safety of fixed income and money market products as stock markets oscillated. The sell-off included $10.7bn from emerging markets funds, making it the worst week on record for the asset class.

EPFR Global, the funds tracker that produced the data, blamed the sell-off on mounting evidence the US will not sidestep a recession, creating fears for the global economy, as well as the European Central Bank's continued tough stance on interest rates.

Fears over European banks' exposure to US sub-prime debt, as well as concerns that companies such as Ambac or Security Capital, which insure institutions' bond investments, will not be able to meet their commitments, added to the problems.

EPFR said a "large chunk" of the cash withdrawn from equities found its way into money market funds, which are intended as safe but low-yielding investments. They absorbed $21.4bn for the week.

Funds that performed well included financial services-sector products, paradoxically, absorbing a net $898m. Year-to-date inflows have now hit $2.75bn, which EPFR put down to investors betting that the sector was undervalued.

Cameron Brandt, an analyst at the data provider, said the same thing could happen to emerging markets funds: "If the pattern we've seen in the flow data over the past 10 months holds up, it's likely that a sizable number of investors will see this as a buy signal."

Separately, December was the worst month in 15 years for UK-regulated open-ended funds and unit trusts as retail investors pulled out a net £377.4m, according to the Investment Management Association, the London-based industry body. Retail investors withdrew a net £332m in November, the first negative month for fund flows since 1992.

Including institutional outflows, investors pulled a net £858.3m from UK funds in December, after withdrawing a net £1.2bn in November.

At the end of the year UK investments funds under management totalled £439.2bn, a 7% increase from the previous year's figure of £410.5bn. The IMA added some institutional funds to its database at the beginning of 2007. Including those funds, the total assets under management figure for last year is £468bn, a 14% increase over the previous year's statistic.

Richard Saunders, chief executive of the IMA, said: "The first 10 months of 2007 saw a continuation of the strong performance of the previous year. In November and December however, as the impact of the credit crunch began to be felt, investors significantly reevaluated their portfolios and the industry experienced its first overall retail outflows in 15 years.

However, last year funds in the IMA's specialist sector outsold their rivals, primarily due to property funds which accounted for £2.1bn of net inflows, compared to £3.2bn into specialist funds as a whole. Specialist funds as defined by the IMA are those not accounted for by the mainstream sectors, so include regional and strategically-defined equities and fixed income funds such as UK equity income funds and global bond vehicles.

The IMA's Saunders said: "The year as a whole was satisfactory for the industry, but the prospect is clearly more uncertain going into 2008."

Citigroup revamps cash bonus packages

Citigroup is replacing up to 20% of the bonus package of its highest paid managing directors with a new restricted stock type that will vest over two years to make up for a reduced cash payout.


The US bank has followed its rivals by reducing the cash element of its bonuses and increasing stock payouts to its highest-paid bankers, who get most of the bonus pool. The banks are trying to ensure the limited cash pool is distributed most heavily to lower paid employees, and asking higher paid bankers to take additional restricted stock.

The cash bonus may be cut by 50% in the case of the highest-paid Citigroup executives, according to a source familiar with the situation.

Citigroup’s restricted stock will also have a shorter vesting period than the usual stock distributed through its capital accumulation plan, which vests over four years. The new stock vests over two years, which reflects its purpose as a replacement for cash.

Rivals such as UBS have issued restricted stock with a one-year vesting period. JP Morgan’s stock packages for its top bankers call for half to vest after two years and the remainder after three years.

JP Morgan has also changed its compensation package for its highest-paid bankers, according to sources familiar with the bank. It has increased by 5% the amount of stock in the pay packages of managing directors making more than $1m. Bankers earning more than $2m in total compensation will receive 10% more of their pay in stock this year.

A banker at JP Morgan earning $1.5m will receive 60% of his pay in cash and 40% in stock, compared with 65% in cash and 35% in stock last year. Merrill Lynch, which used to pay bonuses that were about 75% cash and 25% stock to investment bankers, will this year pay 60% cash and 40% stock, according to chief executive John Thain.

Citigroup and JP Morgan declined to comment. UBS said: “For staff with annual incentive awards above a certain threshold, UBS has always awarded a mandatory component of bonus in restricted shares .”

Union Budget 2008 | EAC wants indirect taxes adjusted on consumer goods

Economic Advisory Council also asks Finance Minister to increase public investment, change income tax slab to stimulate the economy


New Delhi: Expecting the economy to grow at around 8.5% during next fiscal, the PM’s Economic Advisory Council suggested to Finance Minister P Chidambaram on 16 January to adjust indirect taxes on consumers goods in the budget 2008-09 to give a push to manufacturing sector.
The council also advised the Finance Minister to increase public investment and make adjustments in income tax slab to stimulate the economy.
“Our own view is the economy will grow at 8.5% next year. But, there are some areas of concern where there are weaknesses. They are known like manufacturing,” Council Chairman C Rangarajan told reporters after a Pre-Budget with Finance Minister here.
However, the council did not give suggestion on any major reduction in the tax rates.

Rupee gains as exporters sell dollars; bonds rise

The rupee had the first gain in five days on speculation exporters took advantage of the currency’s decline to convert their foreign-exchange earnings.

The currency gained the most since December 24 after its drop to a seven-week low earlier today prompted Companies that sell goods overseas to increase dollar sales, said LV Prasad, chief currency trader at IndusInd Bank Ltd in Mumbai. A weaker local currency boosts the profit of Companies from overseas sales. The rupee also rose on speculation the central bank bought it to curb market volatility.

“There was some talk about the central bank intervening to limit the rupee's losses, which triggered widespread dollar selling,” Prasad said. “Exporters converted their foreign- exchange earnings as the rates were attractive.”

The rupee rose 0.2% to 39.465 per dollar in Mumbai, according to data compiled by Bloomberg. It earlier dropped to 39.775, the lowest intraday level since November 29. The rupee lost 0.6% on Monday, the most since August 16.

India’s central bank will buy or sell foreign exchange to curb volatility in the currency market, based on the nature of capital inflows, Reserve Bank of India governor Yaga Venugopal Reddy said January 3.

The rupee fell earlier on speculation the plunge in global stocks is spurring overseas investors to take money out of the country.

The bonds gained, pushing yields to the lowest in 13 months, after a plunge in shares forced the nation’s stock market to halt trading, stoking speculation the central bank will begin cutting interest rates.

The yield on the security due 2017 declined the most in more than a week on bets a plunge in global stocks will prompt the US Federal Reserve to increase the pace of rate cuts, spurring local policy makers to ease borrowing costs for the first time since August 2003. Bonds climbed as inflation near a five-year low may give the Reserve Bank of India scope to reduce rates.

“The global financial Markets situation has heightened expectations that rates will have to be lowered,” said S Srikumar, chief of fixed-income at state-owned Corporation Bank in Mumbai.

ICICI Securities to divest 15 per cent equity

Mumbai, January 19: ICICI Securities, the brokerage arm of the country's biggest private bank, decided to offload 15 per cent of its equity by way of an initial public offer and private placement of shares.

The shares of ICICI Securities will be listed on stock exchanges in about six months, Chhanda Kochhar, Joint Managing Director and CFO of ICICI Bank, said.

The Board of Directors of ICICI Securities approved the proposal at a meeting today. The company's equity capital is Rs 61 crore. Besides ICICI Securities, the bank also plans to list three other subsidiaries, including the insurance arms to unlock shareholder value, CEO K V Kamath had said recently.

Without indicating the size of the IPO, she said it is not necessary that the bank will sell the shares out of the present holding. There may be a fresh issuance of shares and 15 per cent of the post-issue capital will be with public.

ICICI Securities is a major player in retail broking and posted revenues of Rs 527 crore during the first nine months of the current fiscal while profits were Rs 108 crore in the same period.

Asian Markets End Higher as Banks Gain

Asian markets ended mostly higher Thursday, lifted by banks and financials. Japan and South Korea both closed 2 percent higher with Australia finishing almost 3 percent higher, buoyed by a Wall Street rebound on optimism that a rescue for U.S. bond insurers may be in the making.

The yen [JPY-TN 106.65 -0.13 (-0.12%)] pulled back from 30-month high against the U.S. dollar as appetite for higher yielding assets and currencies returned. Growing expectations that another swinging interest rate cut from the Federal Reserve next week -- coming on top of this week's emergency 75 basis-point slash -- to stabilize the U.S. economy also lent support to markets. The mood remained wary, however, as investors still chewed over the prospect of a U.S. recession.

New York's insurance regulator pressed major banks on Wednesday to put up billions of dollars to support ailing bond insurers. The news pushed the Dow and S&P up more than 2 percent by the close of New York trade.

Banks across the region rose on hopes of this bond bailout, as fears over further credit-related writedowns receded. Japan's Mitsubishi UFJ Financial Group, Australia's Macquarie Group, Hong Kong's HSBC Holdings and Singapore's DBS Group were all moving higher.

In Tokyo, the Nikkei 225 Average [JP;N225 13092.78 263.72 (+2.06%)] closed up 2.1 percent. Rises in other Asian stock markets also helped the Nikkei gain, with battered property shares such as Mitsui Fudosan, surging on a wave of short-covering and banks up in the wake of their U.S. cohorts.

South Korea's KOSPI closed 2.1 percent higher, as investors cheered possible U.S. measures to assist mortgage insurers, while strong earnings results boosted market heavyweights LGElectronics and Hyundai Motor. Hyundai, South Korea's top auto maker, gained 2.61 percent after reporting quarterly operating profit more than doubled, beating forecasts. The numbers were fueled by higher sales and a softer won.

Australia's S&P/ASX 200 Index rose 3.1 percent, extending their rebound to a second day, as hopes that U.S. bond insurers would be bailed out helped restore confidence in banks, and bargain hunters looked for cheap deals. Tracking gains in Wall Street banks, the top local banks led the market higher, with National Australia Bank climbing 4.1 percent.

Hong Kong stocks rose in volatile trade as gains on Wall Street boosted investor confidence, prompting buying across the board, with mainland financials outperforming after falling sharply this week. Hong Kong Exchanges and Clearing, which was also knocked down in this week's selloff, rallied 9.8 percent in heavy trade. The market fell shortly after a strong open, and swung in and out of positive territory before closing 2.3 percent lower in reaction to news of huge losses at French bank Societe Generale.

China's Shanghai Composite Index ended 0.3 percent higher, continuing a rebound that began on Wednesday, as coal miners surged but policy worries hit banking stocks. Traders cited China's severe coal shortage, which investors believe will help big coal producers even though the government has been ordering them not to raise prices.

Banks are down, but not yet out

Multibillion-dollar writedowns have become scarily common, but that doesn't mean that a major bank will go under.

NEW YORK -- With bank after bank posting multibillion-dollar writedowns and other impairments, are we going to see in the near future the failure of one or more major banks?

Maybe, but not very likely.

Of course, there's plenty of bad news: Banks are facing ugly times ahead, according to nearly every consumer and corporate credit metric available. Independent research shop CreditSights argued recently that regional banks in particular face enhanced risks, as the percentage of construction loans that are at least 90 days past due are spiking. Cherry Hill, N.J.-based Commerce Bancorp's (CBH) past due figure amounted to 3.88 percent of its construction loans in the third quarter, up from .70 percent in the second. Eight other (primarily Midwestern) banks fell in close behind, with percentages of construction loans 90 days past due that have at least doubled since the middle of last year.

That's why - aside from U.S. Bancorp (USB, Fortune 500), which is actually increasing its dividend - most banks are aggressively trying to preserve capital, cutting or reducing previously announced stock buybacks and dividend payouts.

Other lending businesses - which were supposed to help spread banks' risk - look troubled, too. For example, Bank of America chief financial officer Joe Price told analysts Tuesday that its credit card holders in four states - California, Nevada, Arizona, Florida, amounting to a quarter of BoA's credit card book - posted 30-day payment delinquencies at a rate five times faster than the rest of its portfolio. It seems likely that this pattern will haunt other credit card issuers as well.

Now the (semi) good news: For all the eye-popping charge-off news in the headlines, bank failures have become exceedingly rare, with only one substantial failure last year in the U.S: Internet start-up NetBank, which was shut down by the Federal Deposit Insurance Corporation over a combination of mortgage problems and capital shortfalls.

Another factor: being small might be a virtue in this era. The devastation wrought from the securitized product market's excesses - the sub-prime and collateralized debt obligation contagions - are almost entirely a product of the money center banks. So Detroit-based Comerica (CMA, Fortune 500), while heavily leveraged to the stalled Midwestern corporate and real estate lending markets, was not big enough to join the league of institutional traders and underwriters of sub-prime mortgage assets of all stripes, including CDOs. Given Citigroup's (C, Fortune 500) nearly $20 billion in writedowns in this area, Comerica's shareholders might be thankful that the bank's managers were forced to stick to their proverbial knitting.

One portfolio manager and 25-year veteran of bank analysis at a multibillion dollar hedge fund told Fortune that the issue of bank bankruptcy is miscast. "The largest banks aren't going to be allowed to collapse like an auto parts maker would," the money manager said. "They would probably be forced into some sort of merger, given the globe's inter-connected markets now."

Of course, that doesn't mean that the market won't see some significant stresses among previously high-flying banks. Consider Washington Mutual (WM, Fortune 500), which is mentioned almost hourly on Wall Street trading desks as the next obvious takeover candidate. Wamu's financials are scary - and getting scarier. In the fourth quarter, it showed a 77 percent increase in net chargeoffs and a spike in non-performing assets of more than 34 percent.

But it is in the realm of cash inflows in the form of deposits and borrowings that Wamu's woes become most apparent. In its most recent 10-Q, the bank revealed that its interest-bearing deposit base shrank to $27.2 billion from $32.7 billion. Total checking deposits also declined by $4.6 billion to just under $51 billion.

More importantly, however, the bank was forced to increase its borrowing from the Federal Home Loan banking system to $52.5 billion, a $31 billion increase from the pervious quarter. Thus, the bank was unable to obtain the necessary amounts of liquidity from the standard secondary market channels.

Can WaMu find a savior among other ailing banks? The company didn't return call seeking comment. But at least in the near term, Wamu's fate may tell us a great deal about where the entire banking sector is headed this year.

Indian investors most optimistic in Asia Pacific: ING

An overwhelming 93% of investors in India expect the overall investment sentiment to be better in 2008 compared to 2007

New Delhi: Indian Investors continue to remain the most optimistic across Asia Pacific as they expect investment sentiment in 2008 would be better than it was last year, a study says.
“An overwhelming 93% of investors in India said that they expect the overall investment sentiment will be better in 2008 compared to 2007, ” according to the ING Investor Sentiment Index that was launched on 23 January.
The survey comes after a seven-session fall in the Indian market, with the benchmark Sensex loosing over 4,000 points in the period. However, the market has staged a recovery of about 1,000 points on 23 January.
Investor sentiment in India has remained highest with a score of 167, despite a drop in confidence level among Asian investors in the fourth quarter of 2007, mainly due to subprime concerns and policy changes in some markets, the survey shows.
“Although the ING Investor Sentiment Index reveals that the subprime-led credit crunch and political uncertainties have made investors more cautious, core sentiment remained positive in the region as 2007 came to a close,” said Eddy Belmans, Asia-Pacific regional general manager, ING Investment Management .
Overall sentiment going into 2008 was robust, with investors in India, Hong Kong and Philippines among most optimistic. Those in Japan, Australia, New Zealand and Taiwan were the least optimistic, the index, based on the analysis of a quarterly survey commissioned by global financial giant ING and carried out by international research firm TNS, revealed.
“India’s investment outlook stays highly positive. Its economic boom will continue due to growth drivers such as consumer spending touching new highs,” said Vineet K Vohra , managing director & CEO, ING Investment Management India.
Massive demand for Indian products, which is reflected in a whopping 68.6% rise in the books of India Inc during the first 10 months of 2007, would also drive the boom, Vohra said.
The real GDP growth is currently estimated at 8%, slightly lower than the previous fiscal 9.4%, Vohra added.
Notably, the previous quarter’s enthusiasm among Chinese investors has been dampened, the survey added.
However, the survey revealed that despite optimism expressed by many Indian investors with respect to the near-term outlook for the domestic economy in the first wave, significantly fewer respondents surveyed in the second wave believed that their home economy improved over the same three-month period.
Meanwhile, investment outlook has remained positive for the short-term future with over three quarters of the respondents of the opinion that the return on investment in the next three months will increase.
Interestingly, the survey reveals that only Indian and Indonesian investment decision making has not been much affected by the subprime led-credit crunch in varying degree. While in most of the surveyed countries, it has impacted the investment decisions over the past three months and the effect would continue in the next three months.
More than 70% of investors in Hong Kong, China, Korea and Singapore claimed that it has affected their investment decision in the past three months, while in India, the figure was only 14%.
A majority of the investors in nine out of the 13 markets (excluding India, Indonesia, Australia and New Zealand) still anticipate the subprime issue would affect their decision in investment in the next three months, the survey said
New Delhi: Indian Investors continue to remain the most optimistic across Asia Pacific as they expect investment sentiment in 2008 would be better than it was last year, a study says.
“An overwhelming 93% of investors in India said that they expect the overall investment sentiment will be better in 2008 compared to 2007, ” according to the ING Investor Sentiment Index that was launched on 23 January.
The survey comes after a seven-session fall in the Indian market, with the benchmark Sensex loosing over 4,000 points in the period. However, the market has staged a recovery of about 1,000 points on 23 January.
Investor sentiment in India has remained highest with a score of 167, despite a drop in confidence level among Asian investors in the fourth quarter of 2007, mainly due to subprime concerns and policy changes in some markets, the survey shows.
“Although the ING Investor Sentiment Index reveals that the subprime-led credit crunch and political uncertainties have made investors more cautious, core sentiment remained positive in the region as 2007 came to a close,” said Eddy Belmans, Asia-Pacific regional general manager, ING Investment Management .
Overall sentiment going into 2008 was robust, with investors in India, Hong Kong and Philippines among most optimistic. Those in Japan, Australia, New Zealand and Taiwan were the least optimistic, the index, based on the analysis of a quarterly survey commissioned by global financial giant ING and carried out by international research firm TNS, revealed.
“India’s investment outlook stays highly positive. Its economic boom will continue due to growth drivers such as consumer spending touching new highs,” said Vineet K Vohra , managing director & CEO, ING Investment Management India.
Massive demand for Indian products, which is reflected in a whopping 68.6% rise in the books of India Inc during the first 10 months of 2007, would also drive the boom, Vohra said.
The real GDP growth is currently estimated at 8%, slightly lower than the previous fiscal 9.4%, Vohra added.
Notably, the previous quarter’s enthusiasm among Chinese investors has been dampened, the survey added.
However, the survey revealed that despite optimism expressed by many Indian investors with respect to the near-term outlook for the domestic economy in the first wave, significantly fewer respondents surveyed in the second wave believed that their home economy improved over the same three-month period.
Meanwhile, investment outlook has remained positive for the short-term future with over three quarters of the respondents of the opinion that the return on investment in the next three months will increase.
Interestingly, the survey reveals that only Indian and Indonesian investment decision making has not been much affected by the subprime led-credit crunch in varying degree. While in most of the surveyed countries, it has impacted the investment decisions over the past three months and the effect would continue in the next three months.
More than 70% of investors in Hong Kong, China, Korea and Singapore claimed that it has affected their investment decision in the past three months, while in India, the figure was only 14%.
A majority of the investors in nine out of the 13 markets (excluding India, Indonesia, Australia and New Zealand) still anticipate the subprime issue would affect their decision in investment in the next three months, the survey said

ICICI Bank ties up with UAE Xchange

The ICICI Bank Travel Card has several unique features that cover every aspect of the trip, which include round-the-clock medical assistance to comprehensive travel and accident insurance

Kochi: Country’s largest private lender ICICI Bank Wednesday said it has tied up with UAE Xchange to promote ICICI Bank Travel Card through latter’s branches in the country.
There were incredible opportunities in the travel card space and the bank was targeting a business of $250 million, ICICI Bank’s commercial and premium card manager Vinayak Prasad said.
Biggest competitor in the space was the travellers cheque, he added.
V. George Antony, Country Manager of UAE Xchange, said the tie-up was the beginning of a great association. “We will review, improve and increase the basket of products and sell across our counters in our 206 branches.” he said.
Available in six currencies, including US, Australian and Canadian dollars, Swiss Francs, Euros and Pound Sterling, the ICICI Bank Travel card offers international traveller the widest choices, which can be used directly for shopping at over 27 million merchants and over one million ATMs, the bank said in a release.
The ICICI Bank Travel Card has several unique features that cover every aspect of the trip, which include round-the-clock medical assistance to comprehensive travel and accident insurance.
UAE Xchange is one of the leading exchange houses in the Middle East, primarily focusing on money transfers and money exchange, and is part of the NMC group, the prestigious business conglomerates in UAE.

Stocks down, but off lows

Wall Street trims some losses after a miserable start to the day on fears of a recession. Global markets plunge. Emergency interest-rate cut fails to soothe investors.

NEW YORK -- Stocks cut losses, but remained deep in the red Tuesday morning, after the Federal Reserve's emergency interest-rate cut failed to reassure investors worried about a recession.

The Dow Jones industrial average (INDU) tumbled more than 2 percent over an hour into the session, after opening down by more than 400 points.

The broader S&P 500 (INX) index, the Nasdaq composite both lost at least 2.5 percent. The Russell 2000 (RUT.X) small-cap index slipped 0.8 percent.

Stock investors have been clamoring for the Federal Reserve to either cut interest rates aggressively at next week's regularly scheduled meeting, or to hold an emergency meeting and cut rates early. Yet, the Fed's decision did little to soothe investors' fears and may have even exacerbated them.

"Even though this is what market participants have been screaming for, it may have shaken their confidence in the Fed's ability," said John Davidson, president and CEO at PartnerRe Asset Management.

"I think the inter-meeting cut frightened the market, making investors think that there must be something wrong if the Fed is going to do this, when it's not done very often in history," Davidson said.

Stocks were closed Monday for the Martin Luther King Jr. Day holiday, but futures indicated a brutal start to Tuesday's trade after international markets plunged on worries about a global slowdown.

That global market selloff prompted the Federal Reserve to hold an emergency telephone conference Monday night, and a decision to slash the fed funds rate was announced Tuesday.

The fed funds rate, a key overnight bank lending rate that effects all kinds of consumer loans, was cut by three-quarters of a percentage point, or 75 basis points, to 3.50 percent. There are 100 basis points in one percentage point.

The central bank also cut the discount rate, which effects bank loans, by 75 basis points to 4.0 percent.

In its statement the bank said it was making the move due to the weakening economic outlook and increased risks to growth. This was the first emergency interest-rate cut since September 2001, when the Fed cut interest rates in the midst of the recession and the panic following the 9/11 terrorist attacks.

Stocks have tumbled in 2008 so far on growing fears that the credit and housing market crises will send the economy into recession, if it's not already there.

One comfort had been bets that at least global growth was holding up and that it might offset the weakness in the U.S. economy. But the slumping global stock markets raised worries about slowing global growth.
Fed slashes key rate to 3.5 percent

Selling was broad based, with 25 of 30 Dow stocks tumbling. The biggest gainer was Home Depot (HD, Fortune 500), which rose 5 percent.

Treasury prices surged in a classic flight-to-quality, with the yield on the 10-year note falling to 3.54 percent from 3.65 percent late Friday. Treasury markets were closed Monday for the holiday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and gained against the yen.

U.S. light crude oil for February delivery fell $3.32 to $87.25 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery fell $10.70 to $871 an ounce.

Taxes and your home equity loan

A house is much more than just a shelter. For many homeowners, it serves as a private bank.

When structured properly, the money you can draw from the equity in your home can provide a nice tax break. In most cases, a homeowner can deduct interest paid on a home equity loan or home equity line of credit (HELOC) of up to $100,000.

The key phrase, however, is "in most cases." There are some deductibility limits. The alternative minimum tax also might also negate the benefits. So before tapping into the residential vault, homeowners should carefully evaluate their overall financial needs and tax situation.

Many uses, one big tax break
Home equity funds are often used to pay for home improvements, remodeling and renovations, college costs or consolidate personal loans and credit card debt. By leveraging the money already put into a house, an owner typically has access to larger sums of money to pay for these items.

And, of course, there is the tax advantage.

"When you talk about taxation and home equity, you primarily look at the deductibility of the interest," says Jim Hiles, a certified financial planner with CBIZ Wealth Management in New York. The tax law allows a borrower to deduct interest on a home equity loan or a combination of loans up to $100,000, regardless of how the money is used.

"It certainly is a popular way to pay," says Hiles, "if you can deduct the interest."

It's that "if" that trips up some home equity borrowers. Whether it can be deducted and exactly how much interest on a home equity loan is deductible depends on several factors.

Interest on $100,000 ... maybe
Most homeowners focus on the $100,000 amount that's usually touted as "deductible" in ads for home equity products. But borrowers also need to be aware of how their property's fair market value and any existing mortgage could affect the tax break.

When the combination of all loans secured by a home, including the first mortgage and any other equity loans, are more than the property's fair market value, the interest on the portion of debt that exceeds the home's value is not deductible.

For example, you have a $95,000 mortgage on your home, which is now worth $110,000. Your bank says you qualify for a 125 percent loan-to-value equity loan of $42,500 ($110,000 x 125 percent = $137,500 minus $95,000 left on your first mortgage = $42,500). Because your son has outstanding college tuition bills and you'd also like to buy him a car to get to and from school, you take the bank up on the offer, planning to deduct the interest on the equity loan on your taxes. It is, after all, well below the $100,000 limit.

Not so fast. This is where the value of your home comes into play. Tax rules say that in these circumstances, you can deduct interest on equity loans up to $100,000 or, when the total amount of all loans secured by a home is more than its fair market value, on the equity amount that does not exceed the property's value, whichever is less. In this case, that's $15,000 ($110,000 minus $95,000).

So, your tax deduction is limited to the interest on just $15,000 of your home equity loan. You can't deduct the interest on the remaining $27,500 of the equity loan even though it is secured by your home and well below the $100,000 limit.

Improved breaks for home improvement
"There is one loophole," says Hiles. "When an equity loan is used for home improvement, it gets a different tax treatment."

In this situation, the equity funds are essentially treated as first mortgages. In IRS terms, this is known as acquisition indebtedness.

"This is a loan that you get to build your house or substantially improve your house," says Hiles. "Adding on a second story or redoing the house counts as acquisition indebtedness. On these loans, you can deduct interest on up to $1 million in mortgage debt."

For instance, if you took out a $200,000 home equity loan to add an audio/video entertainment room to your $500,000 home, you could deduct all the interest paid on that loan. However, if you used that $200,000 to pay for a lengthy European vacation, you could deduct only the interest paid on the loan's first $100,000.

There's no requirement that you document how you spent your equity loan funds, but it's a good idea to hang onto receipts just in case. Hiles says comprehensive records could be crucial in ensuring that you keep your allowable acquisition-debt interest if you're ever audited.

Other equity loan considerations
Home equity borrowers also need to keep an eye on possible alternative minimum tax implications. This parallel tax system could cost some taxpayers their deduction.

Interest on acquisition-debt loans is still deductible under the AMT. However, money secured by your home but used for nonresidential purposes is disallowed.

The tax gap -- money the IRS says it is owed, but which taxpayers have not paid -- also could also pose some problems for equity-loan borrowers. Tax officials and members of Congress believe that improperly claimed home-related tax deductions have contributed to this collection deficit.

"They've announced that they may ask taxpayers to produce documents of original mortgage to verify that interest is indeed within the limit," says Marck Luscombe principal tax analyst at CCH, a tax publisher and software provider. If the IRS finds that you've incorrectly claimed home equity loan interest, it will ask you to pay it back, along with penalty and interest charges.

Finally, keep in mind that while a home equity loan amount might seem relatively small, it still is secured by your residence. "At the end of the day, the bank wants its money back and your home is the collateral," says Hiles. "You could be forced to move out if you don't repay the debt."

Credit card database hacked

A computer hacker has gained access to more than 5 million Visa and Mastercard credit card accounts in the US.

The two companies said on Tuesday that none of the information obtained, which would include credit card numbers, was used in a fraudulent way.

But a UK-based business crime expert warned account holders could still be at risk if their cards were not reissued.

Visa and Mastercard said the hacker breached the security system of a company that processes credit card transactions on behalf of merchants.

Numbers of credit cards can be used to make payments, such as buying plane tickets or hiring cars.

Both Visa and Mastercard operate zero liability policies, which protect card holders from having to pay for any unauthorised or fraudulent charges.

Card holders at risk?

Peter Lilley, a fellow of the UK Chartered Institute of Banking and author of various books on hacking and business crime, said some hackers attack computer systems just to prove the point that the system is insecure.

But he told BBC News Online that account holders of the hacked credit cards could still be at risk.

"To gain access to 5 million different accounts is a lot.

"The bottom line is, when somebody has access to 5 million numbers, it puts those accounts at risk in the future.

"Strictly speaking, the only way to eradicate the risks would be to reissue all 5 million account holders with new cards."

But he also admitted that scenario posed all sorts of logistical problems.

The Visa and Mastercard credit cards are issued by numerous financial institutions.

"And each institution could end up taking a different approach," Mr Lilley said.

Banks warned

A spokeswoman for Visa in the UK could not comment on any plans to reissue the compromised cards in the US.

But a UK spokesman for Mastercard said that decision was up to the card issuers.

"Although fraud is at an all time low, high profile companies, government agencies, internet programs and websites will always be targeted by criminals - Visa and our vendors are no exception.

"It is for this purpose that Visa has global fraud prevention, detection and avoidance programs and is extending secure payments in the virtual marketplace," Visa said in a statement.

Immediate alert

More than 560 million Visa and Mastercard cards circulate in the US.

Mastercard said it informed its members two weeks ago that more than 2 million accounts had been hacked into.

Visa said about 3.4 million of its accounts were accessed by the computer hacker.

Both companies said they immediately alerted the affected banks that issued the cards.

"Visa's fraud team immediately notified all affected card issuing financial institutions, and is working with the third-party payment card processor to protect against the threat of a future intrusion," the company said in a statement.

The firms are also working with US law enforcement officials.

HSBC renames investment banking after strategy shift

HSBC has removed the last vestige of the John Studzinski era by dropping the name of the division he tried to establish as a global force in mergers and acquisitions with a legion of expensive hires.

Studzinski joined from Morgan Stanley in 2003 as co-head of HSBC's corporate and investment banking division with five-year plan to establish the bank in the upper echelons of North American, European and Asian M&A.

Studzinski and co-head Stuart Gulliver spent millions hiring bankers on guaranteed bonuses around the world but the plan met with internal opposition when the division failed to build on initial progress in the M&A league tables.

Studzinski left to join private equity firm The Blackstone Group in 2006 and HSBC narrowed its focus to become an “emerging markets-led and financing focused” firm, and dropped its previously stated target of becoming a top-five bank in European M&A.

HSBC said in a statement today it has renamed Studzinski’s former division global banking and markets, following a shift in strategy in 2006.

Gulliver, a long-serving executive at HSBC and now chief executive of the renamed division, said: "When we introduced our new strategy more than a year ago we promised to be clearer about who we are and what we do. Our new name is straightforward and direct and aligns with how the business is managed."

Global Banking and Markets is comprised of five main businesses: Global Banking, Global Markets, Global Asset Management, Global Research and Principal Investments.

India plans $500bn infrastructure push

Government wants to use $5bn of foreign exchange reserves to boost transport and utilities

The Indian Government is close to launching an investment vehicle in London to use $5bn (€3.4bn) of the country’s foreign exchange reserves as a contribution towards a $492bn investment plan over the next five years for India’s roads, railways and airports.

The special purpose vehicle, which will be a subsidiary of the Government-owned India Infrastructure Finance Company, has gained UK regulatory approval and is expected to open for business next month, according to S S Kohli, chairman and managing director of IIFC.

The company wants to hire advisers and has set a deadline of Friday for expressions of interest. Kohli used to work for the Punjab National Bank and said the subsidiary may take temporary offices in the City of London.

N K Madan, who will be managing director of the subsidiary, said: “The subsidiary is likely to be incorporated in about a month’s time. Initial operations of the entity may start with a staff of between three and four officials.”

The Indian Government estimates an investment of about $492bn will be needed by the end of 2012 to upgrade the country’s roads, ports and airports. In its annual policy statement for 2008, the Reserve Bank of India warned that “infrastructure bottlenecks are emerging as the single most important constraint on the Indian economy”.

Kohli said the London-based subsidiary will function by borrowing funds from the Reserve Bank, custodian of the country’s $272bn worth of foreign currency reserves, in the form of long-term securities.

The fund will then provide foreign currency funds to Indian companies engaged in the infrastructure sector and has set aside an initial investment of $5bn from the reserves to fund domestic projects.

The initiative will run in addition to the $5bn infrastructure fund the IIFC started raising in India last year with investments from the Blackstone Group and Citigroup. Kohli said: “We have held negotiations with a number of other banks, including Deutsche Bank, regarding investments and have secured $2bn from Australia’s Macquarie Bank this month.”

As a result of the Goverment’s investment plans, more foreign and domestic private investors are raising similar funds. Private equity group 3i raised $1bn last year. GE plans to create an infrastructure fund of between $300m and $500m, while ICICI Bank, India’s second largest bank, announced plans for a $2bn fund last September.

Investment banks are attracted to India’s booming economy, which is expected to grow at 8% a year until 2020, according to projections by Jim O’Neil, head of global economic research at Goldman Sachs. He said India’s equity market has risen 499% since Goldman categorised it as one of the Bric economies in 2001.

Its growth has led to a surplus in foreign exchange reserves, but unlike its fellow Bric countries Russia and China, India has no dedicated sovereign wealth fund.

• Financial News is organising an India Investor’s Summit in London on May 19-20. The summit will provide a forum to discuss and develop investment and business opportunities. For more information, contact Jacqueline Nuttall, jknuttall@efinancialnews.com