May 1, 2010 Edition
Bend over backwards for your clients!


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MEGA-DISASTER – The Gulf Oil Spill is looming as the greatest ecological disaster in decades and it is likely to directly affect everyone in the country.  The direct effect could be the lost of thousands of jobs in the Gulf's seafood and tourist industries and collateral businesses.  Nationally, you can expect an increase in the cost of seafood, as well as the price of gas at the pump. Higher gas prices will increase the transportation cost of virtually every product. Let's pray not only for the families of those who lost their lives, but also that we are able to stem this tide of destruction as quickly as possible.

TIMING IS EVERYTHING - At the height of the health care reform debate, Wellpoint announced premium increases of up to 39% in California.  Guess what impact that had on the legislation?  The proposed financial reform legislation appeared stalled in the Senate by Republican filibuster threats, until that is the SEC suit against Goldman Sachs.  Republicans have dropped their opposition to the legislation being introduced on the Senate floor for debate.  In late March, the Obama administration proposed opening more areas for off-shore drilling...wonder what impact the massive Gulf oil spill will have on those plans.

CHINA STILL NUMBER ONE - China is still the top holder of U.S. government debt with $894.8 billion in U.S. securities. Japan is second with $768.5 billion, while the U.K. holds $233.5 billion.

GM REPAYS BAILOUT – GM claims it has paid back its government bailout loan "in full, with interest, years ahead of schedule." Well maybe. Uncle Sam gave GM $49.5 billion to stave off bankruptcy last summer.  GM did pay the $6.7 billion plus interest that was a pure loan, but the bulk of the bailout money was transferred to GM through the purchase of 60.8% equity stake in the company...arguably an even worse deal for taxpayers than the loan. "But wait, there is more!" Since GM has yet to make a profit, where did they get the money to repay the loan? The government put $13.4 billion of the aid money as "working capital" in an escrow account when the company was in bankruptcy. The company is using this government money to pay back the government loan. Keep in mind that the General Accountability Office said, "The Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially more than they have in the past."  On a more positive note, the GAO reports that AIG appears to be stable, with the government cash infusion allowing a "more orderly restructuring of the company" than otherwise would have been possible.

GOOD DEFICIT NEWS? - According to the Wall Street Journal, number of major financial institutions have reduced their forecasts for the federal budget deficit. The changes come as the economic outlook improves, suggesting tax receipts will increase and companies that received federal aid could repay the funds early.

DEBT SALES DOWN - SIFMA say that the Treasury will sell about $351 billion in debt this quarter...down from $483 billion in the first quarter. Good news in that it reflects "attempts to curb spending and the national debt going forward."

CITIES AND BANKRUPTCY – Experts say that although municipalities are facing significant financial stress, they can avoid bankruptcy by reducing their spending. We'll see.

MORE ON CREDIT RATING AGENCIES – Although many believe that credit rating agencies like S&P and Moody's were central in the collapse of the housing market, there has been little change in how they do business.  Many collateralized debt obligations have lost a significant amount of their value, but credit rating agencies continue to collect millions of dollars in fees annually. "Ratings surveillance" payments, as the fees are known, are paid before investors receive payment and regardless of the accuracy. And this in an S&P analyst e-mail dated December 2006, "Let's hope we are all wealthy and retired by the time this house of cards falters."  Click here to read 'How credit watchdogs fueled the financial crisis.'  

OTHERWISE ENGAGED - We're now learning that while the country was sinking into our worst financial crisis since the Great Depression, "SEC employees and contractors cruised porn sites and viewed sexually explicit pictures using government computers."  More details are available at CNN.com.  This, undoubtedly, is not the kind of "stimulus" program we want to finance.  

DERIVATIVES NOT ALL BAD – Many are concerned that the proposed Senate financial legislation could shut out Fannie Mae, Freddie Mac, pension plans and municipalities from the derivatives market. SIFMA says "Dealers that would be subject to such a requirement would most likely stop doing business with those entities. The result is that these counterparties would lose access to an important array of risk management tools" and "The solution is greater regulatory transparency and oversight for the derivatives market, to ensure that regulators have all the information they need to evaluate risks in the market."
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GREEK DEMISE - Credit default swaps (CDS) are also getting some heat as contributing to Greece's debt problems. However, one expert says, "The Greek crisis is the result of massive government spending and debt issuance to fund the spending. In fact, CDSs on Greek sovereign debt actually served a positive role: It alerted everyone around the globe that Greece was in a credit death spiral."

FINANCIAL REGULATION BILL MOVES FORWARD - A bipartisan agreement to forgo the establishment of a $50 billion fund for financial firms has been reached and the Senate is expected to move forward with debate on the legislation. More debate is expected on issues of derivatives and consumer protection.  Click here for more information on the major reform proposals.  NAIFA is particularly concerned about "an amendment on the Senate floor that would establish a liability-ridden fiduciary standard of care for all broker-dealers and registered representatives who provide a scintilla of advice in connection with the sale of a financial product. The Menendez-Akaka amendment assumes the suitability standards current governing broker-dealers and their reps is a weak standard. The assumption is based on incorrect or overstated information being circulated by fiduciary proponents. Click here to see what they are saying about you."  Write your Senators by clicking here.

BOA AND FINANCIAL REFORM - The president of global wealth and investment management at Bank of America believes the industry should re-examine itself and embrace its fiduciary responsibility. "Our clients simply say, 'I have no idea what fiduciary is, but it sounds good so just please put my interests in front of yours and do what is right for me'" and "embracing reform will enable us to champion what is indisputably right for clients."  We assume this is an admission that they have not been doing so in the past.

"TITANS" AND FINANCIAL REFORM – President Obama has asked titans in the financial industry "to put out a statement or a letter in support of regulation reform." The CEO of Citigroup wrote "I believe banks should not speculate with their capital. I believe in transparency of markets. I believe derivatives should be cleared and settled centrally. I believe there should be a strong federal consumer authority to protect consumer interests."

GREECE, PORTUGAL TODAY...TOMORROW? – S&P's downgrading of the credit ratings of both Greece and Portugal has shocked investors worldwide and resulted in sell-offs in virtually all exchanges. Big fear is that the EU may not be able to contain their credit crisis.  Here's what is happening "on the streets" in Greece.  

COMMISSION ON FISCAL RESPONSIBILITY AND REFORM - Our deficit woes are not as dire as the fiscal problems of Greece and other nations, but a quick, credible action plan is still needed to avoid a future crisis. This warning from the first public meeting of a bipartisan commission created by President Obama to recommend ways to reduce the $1.4 trillion U.S. budget deficit and put the nation on a more secure fiscal path. Here are some deficit reduction scenarios from Reuters.com.  

GOLDMAN...SETTLE OR FACE CRIMINAL CHARGES? – Will Goldman Sachs settle its legal battle with the government or will it face criminal charges? We bet on the former. There are too many Goldman Sachs alums in the federal government. The SEC has filed a civil fraud suit against the company, saying it hid important information about a mortgage-related security from its investors, charges that Goldman has denied. Click here for a summary of the SEC's complaint.  

MORE GOLDMANS? - The Securities and Exchange Commission's lawsuit accusing Goldman Sachs of fraud has the firm's competitors examining collateralized debt obligations they put together before the financial crisis. Goldman's rivals want to find out whether they could face the same accusations made against Goldman. "We're pulling out every CDO and triple-checking there was nothing wrong with it," the head of one investment bank said. "There'll be a lot more action from the SEC, you can be sure of that."

HEALTH INSURER UPDATE - According to a Senate report, some large health insurers are changing their accounting practices in order to book administrative costs as medical costs in an attempt to circumvent the upcoming requirement that large group plans must spend at least 85 cents of every premium dollar on actual medical care (80 cents for individual and small group plans).  A number of major carriers (WellPoint, Humana, UnitedHealth, Blue Shield of California) have announced that they will end early the practice of rescinding policies for reasons other than fraud or material misrepresentation. 

TAX INCREASES START 1/1/11 - Get ready for bigger rate increases than previously advertised. Senate Budget Committee is recommending a top tax rate on dividends of 39.6%...a 164% increase from the current 15%. The President's budget only asked for 20%. Add another 3.8% on all investment income (starting in 2013) required by the recent health care bill and you almost triple the top dividend rate to 43.4%. But it gets worse...dividends are already taxed once at the corporate rate of 35%. The individual dividend tax is a second levy on that same income, meaning that the government will get up to 60 cents on each dividend dollar.

VAT PRIMER – "It is worth noting that all welfare programs are government run.  I believe that it is also logical to surmise that if a VAT makes its way into our taxing mechanism, it will eventually eliminate most of the private sector that now provides relief from the hazards of living too long or not long enough."  "While returning from one of our most recent trips to Denmark, we passed through customs at JFK Airport.  The customs official never even looked at our luggage and explained, "Nobody buys much in Scandanavia anymore—it's too expensive." See complete article by Jack Bobo at www.lifeandhealthinsurancenews.com.

GLOBAL BANK TAX - Treasury Secretary Timothy Geithner says that the U.S. is committed to a tax on banks' balance sheets and has expressed confidence that other countries would be in favor of the global tax. However, the Wall Street Journal points out that several nations, including Australia, Japan, Canada and Brazil, have come out against it and such a tax would not help reduce risk in the financial system.

FDIC-BACKED 529 PLANS - Under current law, 529 plan assets can be invested only in mutual funds and other securities-backed products.  H.R. 4178, which passed the House on a voice vote with bipartisan support, would let 529 college savings plans incorporate FDIC-insured bank accounts.  The measure still requires Senate approval.

STAY INFORMED - SIFMA has launched a couple of Web resources designed to help you stay informed about financial regulatory reform developments.  The first, www.capitolinterest.com, provides real-time updates and information about the reform legislation as it advances in Congress.  The second, www.investedinamerica.org, provides more in-depth information on the issues addressed by the legislation.

SCRAMBLING - According to an Investment News article, "states are scrambling for money" by raising taxes on the wealthy and financial advisers are scrambling to help their clients mitigate the impact.  

NEW BENJAMIN - The $100 bill is getting a new look, which also incorporates advanced technology to combat counterfeiting.  The new note will first be issued beginning in February 2011.  

SOCIAL NETWORKING AND COMPLIANCE - If you're using social media in your financial practice, you need to be aware of FINRA's compliance guidelines.  Click here for more information. 

SOCIAL NETWORKING AND UNDERWRITING - Researchers from Celent believe insurers could use information from social networking websites, like Facebook, to help underwrite applicants for life insurance. Examples: A proposed insured may be linked to risky hobbies like skydiving or rock-climbing.  An applicant for life insurance who is "very" involved in the American Cancer Society may indicate a family history of cancer. A little scary!

GOLDMAN FALLOUT - While the original financial reform legislation would have imposed a fiduciary requirement on insurance agents, that requirement was later dropped.  As a result of the SEC lawsuit against Goldman Sachs and last week's Senate hearings, however, a uniform fiduciary standard for the sale of investment products may find its way back into the legislation.  More information is available from the National Underwriter and Investment News. 

GUARANTEED INCOME = HAPPINESS – A MetLife survey reports that workers who suffered through disabling health problems with inadequate insurance tend to report being much less happy than comparable workers who had adequate disability coverage. Well, duh? However, only 40% of the survey participants had disability insurance and of the participants with coverage had, on average, only enough to cover just one-third of their income.

NEW YORK COMPENSATION RULES - According to a National Underwriter article, insurance agents who hold New York non-resident licenses will have to comply with "rules that will go into effect in New York in January that will require them to disclose to their clients information about the compensation they receive from insurance companies."  Producers in nearby states, such as Connecticut, New Jersey and Pennsylvania, should be prepared if this NY regulation takes effect in January.

NML IS HIRING - Northwestern Mutual Life plans to add 2,500 insurance producer interns in 2010...up 150% from the 2005 total. Kudos to NML...this industry needs "new blood."

STANDARDIZE – A Massachusetts General Hospital study says a shift to a standard insurance claim form, standard reimbursement rules and standard claim submission rules could save U.S. physicians and their practices about $7 billion per year. Sounds like a good plan.
 
BUFFETT DEFENDS GOLDMAN – At his annual shareholder meeting, Warren Buffett gave his vote of confidence to Goldman Sachs. And why not? He loaned $5 billion to Goldman in September of 2008 and receives a dividend of 10 percent a year.  Berkshire also got warrants to buy Goldman shares at $115 each.  Buffett does say he might change his mind about Goldman if the SEC charges "lead to something more serious."

CHECK OUT THEIR WEBSITE - AIS Media reports that 59% of surveyed consumers say that, after receiving an insurance offer in the mail, they were more likely to visit the insurance company's website rather than call the company.  Additionally, in researching insurance options, 32% turn to search engines to begin their research while only 3% use the yellow pages and one-third of respondents said they would consider buying their insurance online.

LONG TERM CARE COSTS - According to an annual survey from Genworth Financial, costs for long term care continued to post big increases last year even as the economy sputtered along. The good news in the survey is that costs for in-home care (where nearly 80% of people prefer being cared for) have risen very little during the past five years. Chilling FYI:  At some point, two-thirds of us over the age of 65 will need someone or someplace to take care of us. The Genworth survey includes a useful interactive tool that displays costs by state and local area, and permits comparisons of up to four locations at a time. Some specifics:
  • Licensed Homemaker Services -- $18 national median hourly rate; up 3.0% from 2009; 2.4% five-year annual growth rate.
  • Licensed Home Health Aide Services -- $19 national median hourly rate; up 2.7% from 2009; 1.7% five-year annual growth rate.
  • Adult Day Health Care -- $60 national median day rate; up 12.0% from 2009; five-year growth rate unavailable.
  • Assisted Living Facility, One Bedroom, Single Occupancy -- $3,185 national median monthly rate; up 12.0% from 2009; 6.7% five-year annual growth rate.
  • Nursing Home, Semi-Private Room -- $185 national median daily rate; up 5.7% from 2009; 4.6% five-year annual growth rate.
  • Nursing Home, Private Room -- $206 national median daily rate; up 5.1% from 2009; 4.5 % five-year annual growth rate.
RETIREE DRUG COVERAGE - The health-care overhaul's inclusion of a trim to the corporate tax deduction for retiree drug coverage has already prompted some firms to take hefty non-cash charges. The question is will companies stop offering them, dumping their former employees onto the Medicare rolls? Medco Health Solutions, the big pharmacy benefit manager, believes the "most likely choices for a large percentage" of companies is to stick with their current retiree drug plans or to switch over to something called an employer group waiver plan, which signs up retirees for the Medicare benefit as a group.

MEDICARE AND HEALTH CARE REFORM - Despite the talk of "death panels" and substantial Medicare cuts, the health care reform bill makes no changes to Medicare's guaranteed benefits.  The biggest positive changes Medicare beneficiaries will see are the gradual closing of the Medicare Part D prescription drug "doughnut hole" and an end to co-payments for many preventive services.  On a negative note, Medicare Advantage plan participants may lose some extra benefits or pay higher costs.  More at Bankrate.com.  
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