US FlagJanuary 15, 2009 Edition



NO NEWS IS GOOD NEWS – This old adage can be interpreted in two ways, but let me assure you that in today's financial atmosphere, most news is bad. We will try to spare you some of it and report as much good news as we can find!

SEARCH FOR GOOD NEWS – Well, our plan to find some good news for this issue ran into some roadblocks. Sorry! However, we did find a neat site that tries to provide "financial funnies" with a point. Check out a few at http://itsamoneything.com/FinanceCartoons.html...you can't smile and worry at the same time!

BUSINESS PREDICTIONS - BusinessWeek has released its "Ten Business Predictions for 2009.  They're not all bad!

CITI/MORGAN STANLEY MERGE BROKERAGE - Citigroup will merge its Smith Barney brokerage division with that of Morgan Stanley, a move that is expected to mark the beginning of a break-up of the troubled banking giant. The combined entity, which will be called Morgan Stanley Smith Barney, will be one of the nation's largest brokerages, with more than 20,000 financial advisors and $1.7 trillion in client assets. Morgan Stanley will control 51% of the venture and pay Citi $2.7 billion. The two firms hope to save a combined $1.1 billion with the move. Citigroup has received an investment of $45 billion as part of the government's controversial bank bailout program.  In related news, Citigroup is planning to isolate its "bad" assets into a separate unit, separate from its healthier businesses.  While the "bad asset" division will remain on its books, Citi will report its results separately and will probably sell it or spin it off when market conditions improve.

HELP SMALL BUSINESSES – The heart of the American economy has always been small business and times are getting tough as banks become more careful about lending money. Small businesses (defined by the government as having 500 or fewer workers) account for more than 99% of all employer firms, pay nearly 45% of the country's private payroll and produce almost a third of the nation's export value. When these guys suffer we all suffer. Adding more government workers is not a long-term solution...some of the billions the government is spending need to get to these folks.
 .
HANG ON - Here is the past, present and future in a nutshell from the Barron's Roundtable of 10 investment experts. Gone are the days where asset-price inflation begat leverage, which begat more asset inflation, in a virtuous circle known as the great bull market. People bought bad art, good wine and vacation homes, and got rich investing in stocks. However, greed and excess have popped the bubble. "Uncle Sam has tried to clean up the mess with great gobs of money, but little success. The pain, suffering and deleveraging continued, inflation went bananas, everyone shopped at Wal-Mart and the Hamptons returned to scrub and sand. And no one lived happily ever after -- except for incredibly savvy stockpickers -- at least for a good five years."

TARP RESTRICTIONS – Expect the next round of TARP money to go to more homeowners and have significantly closer supervision. Banks will probably also receive more help to remove troubled assets from their books (the original intention of TARP).  Chairman of the House Financial Services Committee Barney Frank asked the Treasury to make a significant effort to keep home foreclosure rates down and "to strengthen accountability, close loopholes and increase transparency." The plan is to be uniform among those who receive funding from the program, require tight executive compensation limitations, prohibit incentive compensation to the top 25 earners, ban corporate aircraft, forbid incentives based on excessive risk, and bar all "golden parachute payments." Golden Rule, we guess. He who provides the gold sets the rules.


WHO, US? - After receiving billions of tax dollars, banks are finally being asked to account for how they are using that money.  The FDIC has sent a letter to the financial institutions it regulates, telling banks to "implement a process to document how these funds were used," with particular emphasis on how they have helped meet "credit needs in their markets."  It's about time.  Banks have been stonewalling when asked to account for their use of the funds.  Let's see how the FDIC makes out in breaking down those walls.

CITI SUPPORTS ANTI-FORECLOSURE – Apparently "seeing the handwriting on the wall," Citigroup has broken with other mortgage lenders and joined Democratic Congressional leaders in support of a law that would allow judges to reduce the mortgage debt of anyone who has filed for bankruptcy. The proposed mortgage bankruptcy bill would allow judges to modify the terms of a mortgage agreement by lowering interest rates, extending the loan by as many as 40 years and treating the part of the mortgage balance that is in excess of what a home is worth as unsecured debt, meaning it could be dismissed in bankruptcy filings. 

FAST $350 BILLION PLUS – Expect a quick vote on the President and President-Elect's request for the remaining $350 billion in TARP money, as well as on Obama's separate $800 billion-or-so economic recovery plan. This is really hard for the average person to follow. Where is all this money coming from?  Does the Federal government need to bail out states and municipalities?  Have we forgotten that government pension plans (including but certainly not limited to Social Security) are grossly underfunded? What about unfunded medical liabilities? What about the next bubble...commercial real estate, private pensions, etc.? Where will we draw the line?

LIFE INSURERS LOSE SURPLUS – According to Bloomberg, in 2008 the U.S. life insurance sector lost $76.8 billion in surplus, negating six years of gains. Reasons: sinking values of investments in corporate debt and mortgages and increasing liabilities due to equity-market declines that forced a higher funding level to back annuities.

SWIMMING IN RED INK – The Treasury reports that the federal government has run up a record deficit of $485.2 billion in just the first three months of the current budget year. The deficit is on track to surpass $1 trillion for all of fiscal 2009 and some economists believe it could go much higher. All the red ink is occurring because of the massive spending on the $700 billion financial rescue program and a prolonged recession which has depressed tax revenues.

MORE THRIFT CHARTERS - Hartford and Lincoln have been given the green light to buy federal savings banks and become federally regulated bank holding companies.  The companies are doing this in an attempt to become eligible to participate in the federal Capital Purchase Program (part of TARP).

THE FINGER FINANCIAL FACTOR - According to a new study by researchers at the University of Cambridge, experienced traders with the longest ring fingers made more than triple the amount of money of those with shorter fingers. According to the study, "The success and longevity of traders exposed to higher levels of prenatal androgens further suggests that financial markets may select for biological traits rather than rational expectations."  Who thinks up these studies?
REGULATE THE REGULATORS - The U.S. Government Accountability Office believes efforts to update the financial services regulatory structure should focus on making regulators more accountable. The GAO says policymakers also should ensure that "appropriate determinations are made about how extensive such regulations should be, considering that some activities may require less regulation than others." We do know this...many compliance departments in many insurance companies are "majoring in the minors." As we see it, the two main issues "in the field" are suitability and outright fraud...not disclaimers and Website wording. Further, the GAO points out that in the insurance sector alone, 55 state, territorial and other local jurisdictions share regulatory responsibilities. Yes, that is too many and they're not effective enough.  Consider our most recent crook, Marcus Schrenker, who attempted to fake his death by parachuting from an airplane.  This man reportedly scammed clients out of millions of dollars through fraudulent annuity activities, all right under the nose of federal and state regulators, not to mention insurance companies.  Of course, that pales in comparison to Bernie Madoff's $50 billion scam!

ANOTHER ONE - The SEC and Commodity Futures Trading Commission recently shut down another Ponzi scheme, this time for "only" $50 million.  The Philadelphia-area fund manager has been committing fraud since 1995.

FEDERAL REGULATORS - Here's a good explanation of the various federal regulatory agencies and what they (are supposed to) do: finance.yahoo.com.

PENSION FUNDING DOWN – According to Towers Perrin, large defined benefit pension plans have ended 2008 with only 66% of the assets needed to cover their obligations.  The firm estimates that the "funded ratio" dropped 20% in the fourth quarter of 2008 alone.

LENIENCY PLAN - In light of the nation's financial problems, the IRS has announced steps to be more lenient on taxpayers who are unable to meet their tax obligations.  Click here for more information.  

INFLATION FROM BAILOUTS – As the Feds continue dumping money into the economy, inflation risks down the road increase proportionally. This pressure may cause the central bank to raise interest rates before the credit markets have completely recovered. Oh joy.

ONLINE APPLICATION - The Social Security Administration has unveiled on online application that can be used to apply for retirement or disability benefits "in 15 minutes or less."  Check it out at www.ssa.gov.  

FUNDS DOWN BUT TAXES DUE – Many mutual fund investors suffered huge losses in 2008, and there may be more to bad news to come. Despite the losses, dividends from the funds are still taxable income to their shareholders. "Phantom income" is rarely a good thing, but this is adding "insult to injury." But at least taxes on capital gains and most dividends (those labeled "qualified" on the 1099) are low...15% for most shareholders.

DISCOVERING WHAT MATTERS - The MetLife Mature Market Institute has published an analysis of what brings contentment to Americans ages 45 to 74.  The report explores the balance between money, health/well-being and meaning.  A copy of the study is available here, and you can review the accompanying workbook by clicking here.

RMD PROCEDURES - The IRS has released procedures dealing with the required minimum distribution waiver for 2009.  One important point to remind your clients about...anyone who reached age 70-1/2 in 2008 and elected to defer their initial required minimum distribution until 2009 must still take that initial required minimum distribution by April 1, 2009.  The IRS procedures are available at www.irs.gov.  

KEEP THEM WORKING - Treasury Department researchers are looking at ways to "bring Social Security obligations into better alignment with revenues" by encouraging people to work longer and retire later.  One pretty obvious suggestion is to increase the minimum retirement age from 62 to 63.  The normal retirement age could also be increased and Social Security taxes could be reduced for those who are eligible for Social Security benefits but who continue to work.

REBRANDING ITSELF - In an attempt to distance itself from its parent company, AIG Financial Advisors Inc. is renaming itself as SagePoint Financial Inc.

FINAL INDEXED ANNUITY RULE - The SEC has put a copy of its final version of Rule 151A on its Web site at www.sec.gov.  The final rule, which will reclassify most indexed annuities as securities, is scheduled to take effect on January 12, 2011.  

FIVE MISTAKES IN A BAD ECONOMY – These are common sense, but a reminder for your clients might be in order:
1.    Living la vida Visa
2.    Invading your nest egg
3.    Paying for college without applying for aid
4.    Investing inertia
5.    Obtaining cash from your home

FREE CREDIT REPORT - There is only one place to get your free, federally mandated credit reports and it's here: AnnualCreditReport.com. You are allowed a free credit report from the three major consumer reporting agencies in the U.S.: Experian, Equifax and TransUnion. Other sites also offer credit reports, but you have to pay for them. When you go to AnnualCreditReport.com, you are given the option to get all three reports at once or one at a time. Choosing to get all three reports at once is the simplest.  Other people like to space out the reports, getting one from each agency periodically throughout the year.

FINANCIAL LITERACY – Bankrate.com has a very good series of articles in a section called Financial Literacy. Check it out here.  It is very comprehensive and you may find some worthy of forwarding to clients.

SLATS - Life insurance owned by an ILIT is a popular estate planning tool, but the policy's cash values can be "locked up" inside the ILIT. The Spousal Lifetime Access Trust ("SLAT") is a special type of ILIT that addresses the issue of providing access to life insurance cash values, while simultaneously keeping the life insurance proceeds out of the grantor-insured's gross estate. See details at www.producersweb.com.