FSO E-NEWS WEEKLY
















US FlagMay 1, 2008 Edition


RATE CUT – The Federal Reserve cut the federal funds rate to 2% yesterday, the seventh cut since September, when the rate was at 5.25%.  In its statement, the Fed signaled that this may be the last rate cut for a while, as it continues to monitor inflation pressures.

COST OF HEALTH CARE – This is depressing.  According to an Aon survey, the median U.S. household income is about $48,000 annually and the median amount families spend on employer-sponsored health care each year ($3,120) is edging closer to one month’s salary.  Then we have the Robert Wood Johnson Foundation reporting that the cost of health insurance is far outpacing the increase in incomes.   Texas provides an interesting case study of the challenges presented by our current health insurance system.  Beginning in the late 1990s, Texas implemented some pretty serious medical tort reforms, which have resulted in a plunge in medical malpractice lawsuits.  As a result, you might think that Texans have seen at least some leveling-off of their health insurance premiums, but you’d be wrong.  Instead, Texans saw their health insurance premiums increase by 40% from 2001 – 2005...the third highest increase in the nation.  How come?  It turns out that Texas holds the dubious distinction of ranking No. 1 in the percentage of residents without health insurance, contributing 5.5 million of the nation’s 47 million uninsured people, and some portion of the unpaid health care received by the uninsured gets passed on in the form of higher premiums paid by Texans with insurance.

LIBERTY MUTUAL ACQUIRES SAFECO - Liberty Mutual will acquire all outstanding Safeco stock for $68.25 per share in cash. The deal is valued at $6.2 billion and will make Liberty Mutual the fifth largest U.S. P&C insurer, with about 15,000 independent agents.  Expect to see more consolidation in the insurance industry.

RECESSION IS HERE - In the past couple of months, economists have shifted their debate from whether a recession will occur to how long and deep it will be. The Fed expects the recession will be short and the economy will quickly bounce back...but who knows?

AMBAC MAY NEED MORE MONEY – Major bond insurer Ambac has lost money for three straight quarters and may be forced to raise more capital. Its stock is down 43% and the $1.66 billion lost raises questions about its "AAA" credit rating. "Just when you thought things are getting back to normal, there are these horrible numbers," said analyst Robert Haines, "If trends like this continue, they are going to have to go back to the markets very soon.”

SUBPRIME LOSSES CONTINUE - Total Securitization reports that defaults of credit vehicles based on subprime mortgages have gone from $54 billion at the beginning of this year to $170 billion currently.  The mounting defaults in the U.S. housing market have hindered the collateralized debt obligation market.

MORE CASH FOR INVESTMENT BANKS - Investment banks may soon be required by the SEC to hold larger cash cushions in times of market upheaval...mainly because of the collapse of Bear Stearns. Many think that the SEC was negligent and missed the warning signs of the meltdown.

SEC TO PROPOSE RULES FOR CREDIT AGENCIES - SEC Chairman Christopher Cox is planning to propose rules to “strengthen accountability, competition and transparency of the credit-rating agencies.”  The three major ratings agencies have been criticized for failing to more quickly recognize the subprime meltdown.

UBS INVESTMENT LOSSES TO STAND ALONE – After being battered with $37 billion of losses in the subprime crisis, UBS will stop using profit from its wealth-advisory unit to subsidize its investment bank.  "Surpluses from the wealth-management business will be returned to shareholders." The decision will probably remove UBS from investment-banking on the global stage.

BANK FAILURES - John Dugan, U.S. Comptroller of the Currency, believes the weakening economy could cause a wave of bank failures. He does not expect, however, as many failures as during the late 1980s and early 1990s.


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TAKING THE FIFTH? - The SEC has refused a congressional request to explain why it dropped an investigation into whether Bear Stearns harmed investors by improperly valuing complex debt securities. The SEC cited confidentiality in its decision. 

BANKS NOW NEED RESERVES – Heretofore, bank losses generally have been the result of massive write-downs related to bad debt. Some analysts believe the cost to build reserves to cover losses on defaulted loans could be just as high and involve far more banks. Oh joy...

FANNIE MAE - Three former Fannie Mae executives have agreed to settle with the government for $31.4 million regarding their roles in the accounting scandal of 2004. The real question is how and why executives of a “semi-public” organization were allowed to make that much money in the first place.

SEC WANTS MORE MONEY – The SEC is seeking more money from Congress to pay for the agency's oversight authority that has been expanded to include credit-rating agencies and investment banks. Sure hope they will do a better job than they did with their last budget.

COUNTRYWIDE CEO – The SEC has been looking into the filings of Countrywide Financial’s CEO, Angelo Mozilo. He earned about $10.8 million in compensation in 2007, which is far south of his 2006 earnings of $51 million. More disturbing is the timing of Mozilo’s sales of more than $121 million in stock options last year before the value tanked. 

WACHOVIA TROUBLES - For failing to stop unethical telemarketers from taking advantage of elderly customers, Wachovia has agreed to pay a settlement valued at $144 million. According to allegations, Wachovia provided marketers with customers’ bank account information while selling vouchers for discount travel and groceries and other products.  In addition, Wachovia is now embroiled in a federal investigation targeting money-laundering by drug organizations.

SWF GROWTH – It’s predicted that if sovereign wealth funds continue their current growth rate (24% a year for the past three years), they will surpass current U.S. economic output by 2015 and EU output by 2016.  The combined value of sovereign wealth funds is currently put at $3.5 trillion, exceeding the established economies of Britain, Germany or France.

GENETIC INFORMATION BILL PASSES - The Genetic Information Nondiscrimination Act, which bars employers and health insurers from discriminating based on the results of genetic testing, was passed resoundingly by both the House and the Senate. Supporters argued on the Senate floor that the bill could help advance the current understanding of genetic information and was supported by major insurance industry groups.

WALL STREET JOB LOSSES – The New York State Department of Labor estimates that Wall Street may lose over 36,000 jobs as a result of the credit crisis.  That’s a loss of one in five Wall Street jobs, which could have a significant impact on the New York City economy.

BIG PENSION FUNDS – A recent report indicates that, as large companies are under pressure from a slowing economy, they may also be forced to make larger contributions to their pension funds to make up for financial losses.  Another trend beginning to be realized is a movement of pension funds out of equity investments in order to shield them from market volatility as baby boomers begin retiring in large numbers.  More information on the report is available in a NYT’s article at www.nytimes.com.  
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OPTIMISM! -  Money Magazine says that despite the doom and gloom of the financial news lately, there are some reasons to believe the situation may be improving. Their suggestion is to take a long-term view, realize that the most pessimistic forecasts are often extreme and note that even Warren Buffett is bullish in the long term.  And perhaps in the short term as well...Mr. Buffett took advantage of the credit crunch to team up with Mars Inc to buy No. 1 chewing gum manufacturer Wm Wrigley Jr Co for $23 billion, creating the world's largest confectionery company.

FINRA DELAYS VA RULE – Under proposed FINRA Rule 2821(c), effective May 5, 2008, FINRA member firms would have seven business days after the client signed the application to review the suitability of an annuity application. FINRA has, however, postponed scheduled enforcement of the rule while it rewrites the regulation to address concerns from member firms.  At this point, it looks like enforcement of a revised rule won’t take effect until October or later.

ADVISOR REPS - Cerulli Associates reports that brokerage firms are turning to "rep-as-adviser" programs as an alternative to banned fee-based brokerage accounts. The programs are nondiscretionary advisory programs that use a wide range of investment types and have different support requirements compared with fee-based brokerages. The accounts existed before a federal appeals court decision in March 2007 outlawed fee-based brokerage accounts.

INFLATION UP, GROWTH DOWN - New Federal Reserve data show a worrying increase in inflation along with a growing economic slowdown. Analysts still believe the report supports yesterday’s Fed interest-rate cut, but not many more.

CONSUMERS BLUE – According to Reuters and the University of Michigan, consumer confidence has fallen to its lowest point since 1982.  In April, their Confidence Index fell to 62.6, down from March’s figure of 69.5, marking a 26-year low, when the index hit 62.0 in March of 1982.

MIGHT HAVE SOMETHING TO DO WITH BEING BLUE – The S&P Case/Shiller Home Price Index, which tracks 20 of the largest housing markets, showed prices dropping 12.7% in the 12 months ending February.  That’s the largest fall since the index began tracking prices in 2000.  Las Vegas has taken the biggest hit with a 22.8% drop, followed by Miami at 21.7% and Phoenix at 20.8%. 

NAIC AND DESIGNATIONS – The NAIC is looking at publishing a professional designations bulletin that would be sent to insurers and producers, as well as an alert that would “warn older consumers to watch out for flimsy producer professional designations.”

DETECTING RETIREMENT SCAMS – FINRA has created two websites designed for purchasers of retirement plan services.  One site is intended for employees (http://www.finra.org), while the second is designed for employers (http://www.shrm.org/financialliteracy).

BAFFLED – No surprise here...an AARP survey finds that Americans find financial language “technical and confusing.”  In addition, more than half of those surveyed don’t read financial literature because “it’s too hard to understand.”  More on the survey is available at www.aarp.org.  

LTC COSTS – Genworth Financial reports that the average annual price of a private room in a nursing home has increased to $76,460, up 2% from 2007.

PROSTATE CANCER? STANDARD - The Hartford has become the first insurer in the nation to offer life insurance at standard rates to men who have been successfully treated with radiation for moderate levels of prostate cancer. (FYI, the National Cancer Institute says almost 186,000 men will be diagnosed with prostate cancer this year, but thanks to early detection and improved treatment options, 93% of men diagnosed with prostate cancer today will live at least ten years, compared to just 50% in the 1980s.) Hartford will offer standard rates to men 70 and older who have been treated with radiation for moderately aggressive prostate cancer.

RAIDING RETIREMENT PLANS – A WSJ/Harris Interactive Personal Finance Poll reports that about 25% of people who are “actively planning for retirement” have made premature withdrawals from their retirement plans.  About 45% of the people who have made premature withdrawals either cannot pay back the funds or have not yet begun to do so.  Not surprisingly, premature withdrawal activity is more prevalent at lower income levels and in part-time employment situations.  We also have indications that the current economic climate is slowing down 401(k) contributions, with a reported 8% of employees stopping or reducing their 401(k) contributions in recent months.

OUTSOURCING DEBT COLLECTION – Americans who fall behind on their debt payments may be receiving calls from India, as debt collection is the latest business to experience significant outsourcing.

DISABLED VETERANS INSURANCE IMPROVEMENT ACT – The Senate overwhelmingly passed legislation to permit disabled military veterans to purchase additional life insurance and disability insurance benefits from the federal government.

WOMEN’S WORRIES – According to an online poll, nearly 70% of women who took part in the poll cited financial strain as their top concern.  Read more about the poll here.   Speaking of women, a Hartford survey reports that fewer than half of mothers who work outside the home have any disability insurance and only 37% have long-term disability insurance.

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IRS NEWS – In 2001, the IRS started allowing taxpayers who want to make generation-skipping transfers to seek an extension of time for allocating their generation-skipping exemption.  Since the Service received so many requests for extensions, it’s now working on regulations to replace the 2001 extension system.  In other news, the IRS has proposed new regulations on how executors should calculate the value of taxable estates.  If approved, the new regulations would apply to the estates of individuals dying after April 24, 2008.  A copy of the proposed regulations is available here.