US FlagMarch 1, 2009 Edition



BIG BUDGET - President Obama is asking for a $3.5 billion budget for fiscal year 2010, creating the biggest U.S. deficit since World War II. A $1.75 trillion deficit for the 2009 fiscal year is projected in Obama's first budget. That is equal to 12.3% of GDP...the largest share since 1945 when the country ran a shortfall of 21.5% of GDP.  The complete budget blueprint is available at www.whitehouse.gov.  Here's a brief summary:
  • HEALTH CARE - President Obama's budget proposal includes $634 billion for health care reform. The budget does not lay out a road map for achieving universal health care coverage, although it does contain a series of principles that the Administration says must be included in the final reform plan.  According to the Congressional Budget Office, the number of uninsured Americans could rise by 10 million to 54 million in the next 10 years if lawmakers don't take steps to control health care costs and expand coverage. President Obama calls the $634 billion a substantial "down payment" for funding a health reform plan and will create reserve fund to pay for what experts predict will be a $1 trillion cost for health care reform. The reserve fund will be funded by tax increases on high income earners and cuts in Medicare.
  • NEW INCOME TAXES - The budget also includes tax proposals that will benefit the middle income taxpayers and increase tax liability for those with adjusted gross income (AGI) of $200,000 (individual) and $250,000 (married couples filing jointly.)   The top marginal tax rate would go from 35% to 39.6% in 2011. The budget proposal also extends the AMT "patch."
  • ESTATE TAXES  REMAIN  THE SAME - The budget would make permanent the 2009 rules for estate taxes...$3.5 million per individual exemption, 45% rate, and preservation of step up in basis rules.
  • CAPITAL GAINS AND DIVIDENDS - The capital gains and dividends tax rate would go from 15% to 20% in 2011, but only for individuals earning $200,000 or more ($250,000 or more if married filing jointly).
  • HEDGE FUND MANAGERS HIT HARD - "Carried interest" would be taxed as ordinary income, rather than capital income. This means that income paid to hedge fund managers would be viewed as compensation rather than as a return on capital contribution. The result is tax based on income at the potential 39.6% rate, rather than the old capital gains rate of 15%.
  • PAY-AS-YOU-GO - The budget calls for enacting into law Congress' pay-as-you-go rules. Pay-go rules require that any spending increase or tax cut be offset by corresponding spending cuts or tax increases.
  • REGULATORY REFORM - The budget also calls for complete reform of the regulatory system governing the financial services industry, including insurance, securities and banking. The budget also calls for a reserve fund of $250 billion to stabilize the financial services industry as well as a 13% increase in funding for the SEC.
HOW MUCH? - The proposed $3.55 trillion spending plan is equivalent to $11,833 for every person and $25,573 per taxpayer. Does that include "taxpayers that pay no taxes?," you ask? Yes it does!

SLASHING DEFICIT – President Obama has pledged to slash the deficit in coming years, bringing it down to $533 billion, or 3% of GDP by 2013.

HOUSE RAISES OMNIBUS SPENDING 8% to $410 BILLION – It just takes a lot of bucks to keep our government running. The watchdog group Taxpayers for Common Sense calculates that there are an astonishing 8,570 earmarks at a cost of $7.7 billion included in the appropriations. President Obama has promised "no more earmarks," so let's see if he vetoes the bill.

FEDS ASK FOR DIVIDEND CUTS - U.S. banks are receiving pressure from the Federal Reserve to reduce their dividend payments.  This from a letter sent to banks, "While many organizations place great importance on maintaining their dividends, a board of directors should reduce or eliminate dividends when the quantity and quality of the bank holding company's earnings have declined or the [firm] is experiencing other financial problems or when the macroeconomic outlook for the [firm's] primary profit centers has deteriorated."  Some banks are complying...JPMorgan just announced an 85% reduction in their dividend payment.

$750 BILLION MORE FOR BANKS - President Obama anticipates another $750 billion bank bailout this year, a step that would more than double the direct infusion of taxpayer money into the reeling financial sector. The White House's 2010 budget has a $250 billion contingency fund for 2009 that -- if needed -- could leverage three times as much in asset purchases from financial institutions in need of capital. In essence, however, taxpayers would foot the entire $750 billion up front. Administration budget writers say the value of the assets that the government has already acquired suggest a return to the government of 66 cents for every $1 spent, hence the $250 billion net expenditure.
PINK SLIPS...ALL TOO COMMON

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STRESS TESTS – The FDIC will be conducting bank "stress tests" to determine their financial health. The FDIC plans to make the information public and is also calling for buffers to protect banks from worsening economic conditions.
 
NATIONALIZATION - Bank nationalization is a hot topic these days...will or won't the federal government nationalize troubled banks?  Fear of bank nationalization is widely attributed to the hammering bank stocks have been taking.  The most obvious form of nationalization is the outright takeover of a business, such as with Fannie Mae and Freddie Mac, which "vaporizes" a lot of wealth. (See "Why Bank Nationalization Is So Scary").   To many, however, the government owning a sizable investment in a bank amounts to de facto nationalization, which brings us to...

TREASURY, CITIGROUP AGREEMENT - Citigroup and the Treasury Department have announcement an agreement that will give the federal government control of up to 36% of the bank's common stock.  This will be accomplished by converting preferred shares Treasury already holds in the bank to common shares.  The good: the conversion to common shares increases the bank's tangible equity, improving Citigroup's troubled balance sheet.  The bad: the move dilutes the value of existing common share ownership.

RECESSION + FINANCIAL CRISIS = TROUBLE – The Wall Street Journal says that U.S. Federal Reserve Chairman Ben Bernanke's hope for an economic recovery by 2010 may be overly optimistic. New signs indicate that the recession (job losses) and financial crisis (loan delinquencies) are feeding on each other in ways that worsen both. U.S. consumers must agree because in February consumer confidence dropped to the lowest level in more than 41 years.  When will we know things are starting to get better?  Check out "How to Tell When the Economy's Getting Better" from U.S. News & World Report.  

CAPITALISM...LEST WE FORGET – With Newsweek proclaiming "We Are All Socialists Now" and making no comment at all about the abject failures of that system in the past, you might want to watch this 2 minute "oldie but goodie" at www.nmatv.com.

METIFE, AXA & AIG - Bloomberg reports AIG has received bids from MetLife and AXA for its American Life Insurance unit. MetLife made a preliminary offer of $11.2 billion for the life insurer, a price that may drop to about $8 billion because of a deterioration in the unit's financial condition.  However...

AIG SPLIT CONSIDERED – After failing to find enough promising bidders for its various businesses, sources say AIG is talking to U.S. authorities about a "controlled breakup" that would see the insurer split into at least three divisions.  The divisions would be "government-controlled" and might provide a blueprint for splitting other troubled firms.

FIVE GOOD THINGS - Steven Weisbart, chief economist at the Insurance Information Institute provides these "5 points for a brighter future":
1.    There are some signs of thawing in the interest rates banks charge to lend money to other banks, suggesting the current tight consumer credit markets may start to ease up.
2.    The Obama administration's drive to reduce the nation's oil consumption could reduce energy prices.
3.    The rate of credit growth has slowed. That's a symptom of the sluggish economy, but also a sign that consumers are trying to live within their means.
4.    The threat of higher inflation is minimal for the time being, meaning that savers face less erosion of savings and income.
5.    Home prices are dropping. That may trouble sellers, but it should lure more buyers into the market.

STOPPING FORECLOSURES - Said to cost about $25 billion (but who is counting?), here are some details of the new Homeowner Affordability and Stability Plan:

  • Bankruptcy judges would be permitted to rewrite loan terms by erasing some home loan balance and lowering interest rates. Commonly called a "cram down," this provision will require Congressional approval.
  • Eases terms and increases incentives under the Hope for Homeowners program by lowering the monthly payments of borrowers who qualify for refinancing and clearing some of the red tape that has choked the program.
  • The mortgage service companies that collect homeowners' monthly checks would get legal protection if they try to ease loan terms. Currently, they are contract bound to foreclose on delinquent borrowers.
  • Deposit insurance coverage would be permanently increased from $100,000 to $250,000 while the FDIC's credit line with the Treasury Department would increase from $30 billion to $100 billion.

For more information, here are some good articles on "HASP":

STANFORD, MADOFF & MORE – Sounds like a law firm, but we are talking about the $8 billion fraud case involving Texas financier R. Allen Stanford. With frozen assets, a growing stack of lawsuits and hundreds of furious investors and advisers, it is shaping up to be a long-running nightmare that could take years to unravel. And there could be more "mini-Madoff's" still to be detected.

AMERICAN RECOVERY AND REINVESTMENT ACT OF 2009 - Also known as the stimulus package, this $787 billion spending bill was signed into law by President Obama on February 17.  Provided courtesy of The Virtual Assistant, click here for a summary of the legislation's tax incentives. 

RULE 151A LAWSUIT – The American Equity Investment Life Insurance suit against the SEC regarding Rule 151A has been scheduled to begin on May 8.  The suit contends that the SEC's authority is limited under the Section 3(a)(8) of the Securities Act of 1933.  Rule 151A also triggered some fireworks at a recent NAVA meeting, where a FINRA representative clashed on the subject of regulation with the National Association of Insurance Commissioners chief executive and former Senator John Sununu.  It makes for interesting reading on different views of what regulation should be designed to accomplish.  Click here for the article.  

FIDUCIARY ISSUE - Don't be surprised if the SEC addresses the issue of whether or not all financial advisors should be fiduciaries and come under the authority of a self-regulating organization like FINRA.  Addressing the issue of broker and RIA regulation, one SEC commissioner commented that, "We need to look at whether we really need two registration categories.  The rules that apply to someone ought to depend on what they're doing, not what they call themselves and not necessarily on how they charge people."

RETIREMENT PESSIMISM – A Scottstrade survey reveals only 32% of Americans believe they will someday be able to stop working completely...down from 39% last year; 43% of respondents said their retirement savings have decreased 10% or more during the past year; 61% reported cutting back on entertainment spending; and 36% said they were putting off major purchases.

FEDS FORECAST LOW INFLATION - The Federal Reserve anticipates an inflation rate of less than 1% for 2009, and projects the rate will remain under 1.7 % for 2010 and 2011. The low rates are largely due to weakness in the price of commodities, as well as the overall state of the economy.

WHY THE MARKET CONTINUES TO SINK – In Mid October, in trying to explain why the market had fallen off 30% in six weeks, Investor's Business Daily wrote that the freeze-up of the financial system was a big concern, but they cited three other factors as well:

1.    The imminent election of "the most anti-capitalist politician ever nominated by a major party."
2.    The possibility of "a filibuster-proof Congress led by politicians who are almost as liberal."
3.    A "media establishment dedicated to the implementation of a liberal agenda, and the smothering of dissent wherever it arises."

"Today, as the market continues to sell off and we plumb 12-year lows, we wish we had a different explanation but it still looks as we said four months ago. The U.S., which built the mightiest, most prosperous economy the world has ever known, is about to turn its back on the free-enterprise system that made it all possible. No wonder, we said then, that panic had set in."

BAD RICH PEOPLE - Based on 138,000,000 taxpayers in 2007 and Total US population as of July 2008 was 303,824,640:
  • Top 1% (1,380,000)...........pay 40% of all federal income taxes ($388,806.00 puts you in this category)
  • Top 5% (6,900,000)...........pay 60% of all federal income taxes ($153,542.00 puts you in this category)
  • Top 10% (13,800,000)........pay 71% of all federal income taxes ($108,904.00 puts you in this category)
DRUG SALES DOWN - According to Kurt Salmon Associates, consumers are spending 3% less on prescription drugs this year versus last year.  The decline is likely the result of a continued shift towards lower-cost generic drugs and an increasing number of consumers who are looking to save money by self-medicating or simply reducing overall drug consumption.

LIFE PREMIUMS DOWN – According to LIMRA, new annualized premium for individual life insurance fell 14% during the fourth quarter of 2008, bringing the year-end results to a negative 7%.  The quarterly decline in premium is the greatest since the last quarter of 1951.

LTC SALES - About 400,000 people about LTC insurance in 2008, but they're buying less expensive coverage with benefit periods of five years or less.  The average age of LTC purchasers is dropping, with 84% under age 65.

OLD TOADS DRIVING – Everyone knows that old folks can't drive, but check out these statistics gathered by AAA on drivers over the age of 65:
  • Kill fewer motorists and pedestrians than drivers in any other age group.
  • Have the lowest crash involvement rates per licensed driver.
  • Have the lowest crash involvement rates involving alcohol impairment.
  • Have the highest seat belt use among adults.
SIMPLY NUTS - Here's the American legal system at its "best"...a man gets drunk in Manhattan, falls onto the subway tracks, is run over and loses his right leg.  Rather than being grateful to still be alive, he sues and is granted $2.3 million by a jury on the premise that the subway driver had time to stop the train.