FSO E-NEWS WEEKLY

January 15, 2010 Edition

THE BIG ZERO - We've seen lots of suggestions of names for the decade we just exited, but economist Paul Krugman is suggesting the Big Zero. Why? "It was a decade with basically zero job creation"..."It was a decade with zero economic gains for the typical family"..."It was a decade of zero gains for homeowners"...It was a decade of zero gains for stocks, even without taking inflation into account."

THE TERRIBLE TEENS - If 2000 - 2009 was the Big Zero, what should we call with new decade. Investment News nominates the Terrible Teens..."expect the 'new abnormal,' with prolonged joblessness, wage stagnation, and a continued hollowing-out of the middle class." Sounds like fun times are awaiting us.

NEVER HAVING TO SAY YOU'RE SORRY - The first public hearing of the Financial Crisis Inquiry Commission opened with testimony from the "barons of Wall Street," who acknowledged taking on too much risk and "choking on their own cooking," but stopped short of offering any type of apology for their role in the worst recession in decades. There was also a defense made of Wall Street pay practices. Whether they're correct or not, the political deafness of these presumably smart people is stunning. Which leads us to...

'FINANCIAL CRISIS RESPONSIBILITY FEE' ON BANKS - In order to pay the cost of the government's TARP bailout, President Obama is expected to propose a new .15% tax on liabilities of the nation's largest banks (those with assets of more than $50 billion). As written, the "financial crisis responsibility fee" would also apply to insurers that own banks, thrifts or securities broker-dealers. Here's a summary of the proposal. Whether this approach is appropriate or not, it's sure to have wide-spread public support. And then we have...

EXECUTIVE PAY LIMITS - While widespread public outrage over Wall Street pay packages has failed to generate significant activity in Congress, the FDIC is considering a plan to penalize banks for risky compensation practices by tying the fees banks pay to the FDIC to the steps a bank takes to eliminate compensation practices that encourage risky behavior. According to The Washington Post, "Banks that don't comply would face higher fees, on the theory that bankers paid solely for short-term results will take greater risks, increasing the chances of a bank failure."

DOW CLOSED 2009 UP 19% - The Dow ended the year at 10,428.05 up 18.8%...the biggest annual percentage gain in the Dow Average in six years. However, it is still down 26.4% from its all-time record set in October 2007, when the Dow closed above 14,000.

FANNIE, FREDDIE LOSE $400 BILLION – American Enterprise Institute (AEI) reports that taxpayer losses from Fannie Mae and Freddie Mac will top $400 billion. The Treasury raised its limit on federal support for the two "government-sponsored" enterprises and said it would provide an unlimited amount of assistance as needed for the next three years to alleviate market concern that the government lifeline for Fannie Mae and Freddie Mac, the largest sources of money for U.S. home loans, could lapse or be exhausted. Lax regulation of Fannie Mae and Freddie Mac led to the mortgage companies taking on too many risky loans. The AEI believes, "It turns out it was impossible to regulate them. They were too powerful" and "no one knows how much will be needed to keep the companies solvent."

STATE OF THE UNION - The White House is waiting to set a firm date for the annual State of the Union address, in the hope that President Obama will be able to talk about Congressional passage of a major health care reform bill. However, to the relief of "Lost" fans, it will not be broadcast Feb. 2, when ABC is set to start the final season of the series.

RECONCILING DIFFERENCES - Democrats from the House and Senate continue to work on reconciling differences between the House and Senate versions of the bill. The conventional wisdom is that the final bill will cost about as much as H.R. 3962, the House bill -- $1.5 trillion -- but would rely on the taxes proposed in H.R. 3950, the Senate bill. The Senate bill includes an additional Medicare payroll tax on high-income workers, as well as a "Cadillac plan tax"...40% excise tax on insurers that sell high-value health benefits packages with a value threshold for most active workers of $8,500 for individuals or $23,000 for families. Union leaders are not happy about this proposal, but the word is they have reached a compromise with the White House on the "Cadillac plan tax."

SWALLOW PILLS NOW, READ LABEL LATER - If this wasn't so serious, it would be comical. No one really knows what will come out of the "reconciled" health reform bill, but all the secret "backroom" negotiations should be a concern for all Americans. What has happened to the two purported objectives of covering the uninsured and reducing health care costs? They have long since (prior to the introduction of the bills) been lost in a political stampede for power.

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GOVERNMENT COVERUPS, HOW HIGH AND HOW LOW CAN IT GO? - Apparently AIG withheld important information about its dealings with financial counterparties in the lead-up to its collapse and bailout by the Federal Reserve. That is a given, but the most troubling aspect of this episode is that it was officials at the Fed (not AIG) who seem to have orchestrated the secretive and potentially illegal activities. This uncovered only through an investigation conducted on behalf of the House Oversight and Government Reform Committee. Is this what it has come to in America: Public officials making policy via cover-ups, secret deals and government coercion? How high? The New York Fed, led by our present Treasury Secretary Timothy Geithner, apparently told AIG to withhold details from the public about credit default swap payments it made to Goldman Sachs and Deutsche Bank. Beware the "political/financial complex."

BUSINESSES RELUCTANT TO HIRE – Some business groups and economists believe that new regulation and higher taxes may be scaring many businesses from hiring and thus prolonging any rebound in employment. There is "just too much uncertainty about what happens beyond 2010." The Administration is seeking to push through major overhauls of energy and health care policy, impose dozens of new workplace rules and raise income taxes.

TAX AND CUT – The Committee on the Fiscal Future of the United States says the U.S. must soon raise taxes or cut government spending to curb its debt, and failure to act will risk a crippling dollar crisis. Despite promises to the contrary, many expect taxes to hit the middle class hardest.

MOVE OVER, WALL STREET - The Wall Street banks weren't the only ones who had a banner year in 2009. Seeing their net income jump by over 47% from 2008, the Federal Reserve made a $52 billion profit in 2009, returning a record $46 billion to the U.S. Treasury...the largest payment since the central bank was initiated in 1914. Unlike most government agencies, the Fed pays for its own operations and returns its profits to the Treasury. According to The Washington Post, "The numbers are good news for the federal budget and a sign that the Fed has been successful, at least so far, in protecting taxpayers as it intervenes in the economy."

STIMULUS JOBS? - The White House has abandoned its method of counting jobs under President Barack Obama's economic stimulus, making it impossible to track the number of jobs saved or created with the $787 billion in recovery money. The new system, quietly published last month in a memorandum to federal agencies, is no longer about counting a job as saved or created; now it's a matter of counting jobs funded by the stimulus.

NEED JOB? GOVERNMENT IS HIRING - Overall job numbers are weak, but 3,300 were added to the federal government's payroll last month. As job losses continued in construction, manufacturing, retail, leisure and hospitality, as well as at the state and local government level, the Federal government posted a job gain and has done so for seven consecutive months, bringing December's total to 2,167,000. That does not include the U.S. Postal Service, which has slashed jobs, reduced overtime hours and proposed scrapping its Saturday delivery to cut costs. FYI, the economy has lost 7.2 million jobs since the start of 2008.

BANKS' BIGGEST RISK - A review by U.S. bank examiners indicates the biggest risk to U.S. banks in 2010 is the potential losses on commercial real estate loans. The review found that such loans will likely affect smaller lenders, but will not pose a major threat to the financial system as a whole. Here's an article on the "slow-motion wreck" that is commercial real estate.

CRACKS IN THE FOUNDATION – "Any economy, or company for that matter, is only as solid as its balance sheet, which is equivalent to the foundation of a house. As a balance sheet's debt ratios increase, the very foundation of the economy or company begins to crack". Great article at www.forbes.com. Some stats:

Total current U.S. national debt: $12.17 trillion;
Medicare and Medicaid: 21.9%
Social Security: 19.2%
Defense and wars: 19.1%
Total current U.S. national debt per taxpayer: $111,622
Debt to GDP ratio: 83.5%

Other key statements:

"Interestingly, the national debt of $12.17 trillion actually excludes Fannie Mae and Freddie Mac debt. The U.S. government became the effective conservator of both of these entities with the Housing and Economic Recovery Act of 2008. The estimated combined on and off balance sheet debt of Fannie and Freddie is purported to be just over $5 trillion. Including this additional $5 trillion in debt, U.S. Government debt as a percentage of GDP is actually more than 120%. On that basis, U.S. government debt as a percentage of GDP is the highest ratio it has ever been, or at least since the numbers were first recorded in 1792."
"Keep your eyes on U.S. government debt...this Queen Mary is not turning any time soon and will hold investment implications related to many asset classes for years to come. We cannot increase our debt exponentially without increasing our borrowing costs."

WHO DONE IT? – Seventy-two percent of Americans say they blame Congress for their financial situation, while 71% blame Wall Street. Congress may be controlled by Democrats, but they are not given much leeway by their partisans, with 70% of Democrats blaming them along with 75% of both Republicans and Independents. Another 63% blame large corporations, 60% blame state government and 47% blame the President and local government.

BANK LIFE SALES UP – LIMRA reports U.S. banks sold 32% more life insurance during the first three quarters of 2009 than they did during the comparable period in 2008, while the total life sales growth rate for the U.S. was down 11% during the same period. Further, banks get about 90% of their life sales revenue via lump-sum, single-premium payments policies.

LIFE INSURANCE INDUSTRY: GET WITH THE TIMES - There's an interesting story in Forbes.com about how the life insurance industry needs to get with the times. "Let's face it: Nobody gets excited about life insurance. It has been around for hundreds of years, and it's surely one of the most socially useful consumer financial products, yet people don't much care who they buy it from--if they buy it at all." The article discusses why and what the life insurance industry can do to "get with the times."

FIDUCIARY STANDARD - Looks like the battle over the fiduciary standard that applies to broker-dealers and investment advisers is heating up. Joining a coalition of consumer groups, the heads of the SEC (Mary Schapiro) and Goldman Sachs (Lloyd Blankfein) are calling for broker-dealers and investment advisers to be subject to the same fiduciary standard of conduct and heightened regulations when providing the same services. Lots of pros and cons on this, but one thing is for sure...the general public doesn't understand the distinctions between the two groups.

HEALTH CARE COST RATE SLOWS - According to a recent report by the Centers for Medicare and Medicaid Services (CMS), U.S. health care spending increased at the lowest rate on record in 2008, but still cost $2.3 trillion...an average of $7,681 per person. The report found that U.S. health care spending rose 4.4% in 2008, the slowest growth rate in nearly half a century and lower than the 6% increase of the previous year. In addition, the CMS found that health care spending accounted for almost 36% of federal spending in 2008, up from 28% the year before. Health care spending still accounted for 16.2% of U.S. gross domestic product in 2008, up from 15.9% in 2007.

HEALTH INSURANCE DEDUCTION - The Joint Committee on Taxation, an arm of Congress, has confirmed just how expensive the employer health insurance deduction is...about $100 billion per year or $1 trillion from 2010 - 2019. Could be this deduction becomes an apple ripe for the picking one of these years.

EXPIRED TAX CUTS - Congressional inaction caused 50 individual and business tax breaks to expire at the end of 2009. While most of them will probably be reauthorized retroactively, it does create inconvenience for some taxpayers. The "biggie," however, is the estate tax...

YEAR TO DIE - 2010 may be the year for wealthy people to die. As things currently stand, there is no estate tax, but the tax will be reinstated in 2011 with a top 55% tax rate. While it seems likely that Congress will reinstate the estate tax for 2009, when and will it be retroactive? What happens if an estate has already been settled before Congress reinstates the estate tax? What about the loss of step-up in basis...what is the impact on all estates? Here's another kicker...what happens in the case of a credit trust will, where the surviving spouse receives an amount equal to the unified credit exemption equivalent and a trust receives the balance? If death occurs now, while there is no estate tax, will the surviving spouse receive nothing? The generation-skipping transfer tax also disappeared on January 1, meaning wealthy individuals can make gifts to grandchildren and pay only gift tax. Will the GSTT also be reinstated retroactively to January 1? About the only certainty is that Congress has created a planning headache by allowing the estate tax and GSTT to expire. And don't forget, Congress not only has to deal with the expired 2009 tax breaks and estate/GST tax issues, but also has to address the Bush tax cuts that expire at the end of this year. All this in an election year as well.

COBRA SUBSIDY - The 65% COBRA premium subsidy has been extended to February 28, 2010.

PRESCRIPTION DRUG COSTS - Wonder why the nation's prescription drug bill is going through the roof? According to a survey by Medco Health Solutions, 51% of American seniors take at least five different prescription drugs regularly and 25% take between 10 and 19 pills daily.

SECURITY TRANSACTION TAX - Investment Company Institute (ICI) and the mutual fund industry claim that pending legislation would impose a $150 billion-per-year tax on securities transactions. The legislation specifically exempts mutual fund share transactions, but the ICI says, "No matter how you orchestrate this tax, the likelihood is that average investors are going to pay it. The mutual fund, on your behalf, is buying stocks and other securities, and it would have to pay the tax. So you will be hit as a fund investor for your share of the tax on the fund's own portfolio securities transactions."

INSURE YOUR LOVE - Life and Health Insurance Foundation for Education (LIFE) is tying a life insurance awareness campaign to Valentine's Day with an "Insure Your Love" ad campaign. LIFE will be using the campaign to help advisors remind clients and prospects to protect loved ones by buying life insurance. See more at www.insureyourlove.org. Hey, love isn't just buying a box of chocolates.

MAKING A DIFFERENCE - LIFE is soliciting stories about how life, disability, LTC and health insurance make a difference in people's lives. Click here for more information on submitting your story.

ASSET-BASED LTC – Expected carriers to offer more types of Life/Long-Term Care and Annuity/Long-Term Care plans and allow for more favorable treatment for payment of riders and benefits. FYI, these plans are being sold very successfully in banks and they make sense. Consider adding them to your product portfolio.

BROKER RECRUITING – Expect the "musical chairs" of brokers from wirehouses to independents to continue throughout 2010, but not at the pace of last year.

FINRA AFTER WELLS – FINRA is investigating Wells Fargo's possible violation of client information rules, as well as bonuses and other money given to recently recruited reps.

FUND MANAGERS OPTIMISTIC - Russell Investments reports that 80% of fund managers expect the stock market to continue climbing in 2010.

INVESTORS PESSIMISTIC - According to Eaton Vance's 11th annual survey of Americans, most investors are pessimistic about the economy, with 82% saying the economy is either in recession or stagnant.

EMPLOYEE CONFIDENCE STEADY - The Spherion Employee Confidence Index, which measures workers' confidence in their personal employment situation and optimism in the economic environment, reveals that more workers are confident in the overall strength of the economy.

NURSING HOME COSTS – According to analysts from the Centers for Medicare and Medicaid Services, spending on nursing home care climbed to more than $138 billion in 2008, up 4.6% from the 2007 total...down from 5.8% in 2007.

CALLING THE IRS - Need help with your taxes? Don't call the people in charge. Three out of 10 people who call the toll-free help line won't get through to a human being...if the agency meets its goals for service. Here is a tax tip...don't call the IRS at all. If you are lucky enough to reach someone, their answers are still likely to be incorrect. How complex has the tax system gotten? Click here for a Forbes.com article that gives an idea of the "tax time torture" facing all of us.

DON'T MESS WITH TEXAS - In the latest Census Bureau annual population estimates, there are now 307 million Americans. Texas added more people than any other state and Wyoming had the highest growth rate in the nation.

RETIRING? GET A PET – Here are 10 reasons why:

Companionship. Loneliness can become an unwelcome companion as we age and can lead to depression as well as physical problems. .
Having a routine. The routine of caring for a pet can bring structure and purpose to daily life.
Exercise. People benefit from regular physical exercise regardless of their age.
Less stress. Older people with pets tend to exhibit less stress than those without.
Getting out. Having a pet, particularly one that requires regular outdoor activity, helps you stay connected to life
Making new friends. It can be hard to meet new people, but pets are great icebreakers.
New interests. A pet can expose you to new interests and activities.
Protection. A dog can provide significant security.
Taking care of something.
Investing in life. At the end of the day, having a pet means that you have made a promise to continue being involved in another life. This commitment is one of the most positive decisions you can make as you get older.