July 1, 2009 Edition

MADOFF WILL DIE IN PRISON - Convicted Wall Street swindler Bernard Madoff, 71, was sentenced to 150 years in prison for a fraud that the judge called so "extraordinarily evil" that he needed to send a message to potential copycats and to victims who demanded harsh punishment. The only problem we see here is the lack of other defendants. There is no way this man did all this manipulation without others being complicit with or at least knowledgeable of his activities.  Reportedly the investigation is continuing, so we may well see charges filed against others.  Also, Allen Stanford, accused of engineering a $7 billion scheme to defraud investors, has been indicted and, as of this writing, is expected to remain in jail until his trial.

FED RATE UNCHANGED - The Federal Reserve interest rate is unchanged at virtually zero and some think that indicates that the economy appears less imperiled than it did several months back. Not sure why because the rate is as "low as it can go," but it might help to revive the housing market by limiting home loan refinancing and putting additional downward pressure on residential real estate prices.

SHORT TERM PAINS FOR LIFE INSURERS – Conning says that the effects of the financial crisis will hamper the life-annuity industry for the remainder of the year due to decreases in assets and surplus. "Our latest forecast for the life-annuity industry projects net operating gain to recover, but realized and unrealized capital losses will continue to challenge the industry at least through 2009." Others see the long term position of insurers as very positive.  A.M. Best reports that assets under management are slowly climbing as the market "flirts" with the possibility of recovery and with insurers able to raise money through equity and debt offerings with the thawing of the capital markets.

HARTFORD CLOSES ON TARP FUNDS - Hartford Financial is selling the Treasury Department $3.4 billion in perpetual preferred stock, the full amount of funding available through the Capital Purchase Program.  Hartford Chairman Ayer said that CPP funding "further enhances our financial flexibility and our capacity to weather significant deterioration in the equity and debt markets, as well as the general economy."

HEALTHCARE REFORM UPDATE - Here are several articles that will update you on the status of healthcare reform:
Where does healthcare reform stand in U.S. Congress?  
How do U.S. healthcare proposals compare?  
5 FAQs about health reform: What you need to know  

PUBLIC HEALTH OPTION...SAVE TRILLIONS - According to the Commonwealth Fund, a national health insurance exchange featuring a Medicare-like government option could save $1.8 trillion more than if only private plans are offered. The report says that while federal spending for health-related costs would grow during the next decade, it would be reduced by a plan that pays doctors and hospital rates similar to Medicare. 

PUBLIC HEALTH OPTION...COST TRILLIONS - Trade groups representing health insurance underwriters warned Senators that inclusion of a public plan in any health care reform legislation would have "devastating consequences" on the private health care delivery system. A government-run plan ultimately would add to the federal budget deficit because no matter how it is initially structured, a government-run plan "would dismantle employer-based coverage, significantly increase costs for those who remain in private coverage, and add additional liabilities to the federal budget." But sustaining the current private system, albeit with "strong market rules and consumer protections," would ensure that "nobody falls through the cracks without disrupting the coverage of tens of millions of Americans who like and want to keep their current health plans."

HOME SALES DOWN BIG – Department of Commerce reports that home sales declined in May nearly 33% below the same period last year. However, the number of newly constructed homes sold last month dipped only 0.6% during the same period.

CITIGROUP RAISES – With $45 billion of taxpayer money, Citigroup has announced that, in an effort to counterbalance reduced bonuses and retain employees, it plans to increase salaries for all employees...all 300,000 plus of them. And, the New York-based financial institution also expects to retain employees through the issuance of new stock options.

FEDERAL WAGES – Speaking of raises, CBS News reports that, counting benefits, the average pay per federal worker will leap from $72,800 in 2008 to $75,419 next year...all 14.6 million of them. That is up from about 12 million when George W. Bush took office.
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INFLATION COMING – Blame it on government spending or the global economy, prices for goods and commodities are bound to rise when the economy improves. Most money managers agree that the U.S. is headed toward a higher rate of inflation, but they don't agree on what to do. Some suggest buying into assets that should benefit from inflation like commodities and oil-related stocks, futures contracts that bet on rising prices of things like wheat, gold, oil, foreign currencies and so on. Others say don't put all your eggs in one basket. "Protection from inflation is one of the key purposes of a diversified portfolio. That's what a diversified mutual fund is supposed to do."

GREENSPAN ON INFLATION - Alan Greenspan, former chairman of the Federal Reserve, says "Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge. If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012." Why do we listen to any of the economists?

FINANCIAL REGULATION OVERHAUL - The Obama administration released a white paper, Financial Regulatory Reform -- A New Foundation: Rebuilding Financial Supervision and Regulation, which is intended to serve as a blueprint for the overhaul of U.S. financial regulation.  Highlights include the Federal Reserve monitoring "systemic risk" in the economy; giving the FDIC the power to seize and resolve the problems of troubled non-bank companies that pose risks to the economy; creation of a National Bank Supervisor; increasing capital requirements for financial companies; creation of an independent Consumer Financial Protection Agency; and additional oversight of asset-backed securities, hedge funds, credit rating agencies and derivatives.  If you're interested in additional analysis, here you go:  Who Would Win Under Obama's Financial Reforms and Who Would Lose Under Obama's Financial Reforms.  

INSURANCE-BROKERAGE CHALLENGE - Insurance-affiliated brokers face major changes under the new financial regulation plan...a fiduciary requirement could force them to choose between advice and transactions. If the proposal to require broker-dealers that offer investment advice to act as fiduciaries is enacted, it will likely upend the insurance broker-dealer business model and force carriers and their registered representatives to decide whether they belong in the advice arena or in the transactional realm. As one planner puts it, "The current industry definition of 'fiduciary' is to put the client's needs first. If you sell, exclusively or principally, proprietary products, you can't meet the standard under that definition. Either President Obama puts those broker-dealers out of business, or he needs to make an exception."  Another says, "The days of having reps out there touting their products over others when rendering advisory services are numbered."

CASE FOR SIMPLER REGULATIONS – This is a novel idea from TIME.  As financial regulation gets more convoluted with each new law, calls are being made to simplify. The argument is that the major problem in financial regulation is its reliance on regulators to know what is best. 

CONSUMER FINANCIAL PROTECTION AGENCY - The Obama administration has proposed creating an agency that would operate something like a Food and Drug Administration for financial products by setting standards for mortgages and enforcing laws aimed at protecting credit card customers.  According to a New York Times article, however, the bank industry is vowing "to fight Mr. Obama's plan with everything they have."  While insurers were initially up in arms over the proposed Consumer Financial Protection Agency (CFPA), recently released details reveal that the new agency would have only limited authority over insurance activities, such as the sale and servicing of credit insurance, mortgage insurance and title insurance.  Otherwise, the legislation creating the agency would exclude "the business of insurance" from the definition of CFPA-regulated "financial activity."

UPHILL BATTLE? - If public opinion carries any weight, the banking industry may face an uphill fight to defeat legislation creating the Consumer Financial Protection Agency.  According to a new Harris poll, only 25% of Americans feel that banks are honest and trustworthy.  On the other hand, banks fare better than other financial institutions, with the "honest and trustworthy" percentage at 13% for life insurance companies and financial planning firms, 7% for investment firms, 6% for mortgage companies, 4% for Wall Street and 4% for credit card companies.

NORTHWESTERN MUTUAL SUIT - Three former sales and financial representative for Northwestern Mutual Life Insurance Company are suing the company for alleged violations of federal and state wage and hour requirements. In essence, the plaintiffs say the company misclassified them as independent contractors rather than as employees because independent contractors are not subject to wage and hour requirements. They are asking for about $200 million.  

STATE UNEMPLOYMENT DEBTS - Fifteen states have already burned through their unemployment insurance funds, forcing them to borrow from the Treasury. Also, 30 states will likely have to borrow as much as $17 billion by next year. Nine million Americans are currently receiving unemployment benefits, approximately three times the number who were receiving them last year.


AGENTS BEING SCAMMED - NAILBA reports that agents in Nevada, California and Ohio have been targets of a scam in which individuals posing as state insurance department employees telephone agents and brokers and tell them that their license may be cancelled because of unpaid fees or penalties. Agents are then told that by providing their credit card and social security numbers, the matter can be resolved over the telephone. Don't fall for it.

TAX BREAK FOR NON-QUALIFIED ANNUITIES - Sens. Kent Conrad, D-N.D. and Pat Roberts, R-Kan. reintroduced legislation that would provide a 50% tax break on as much as $40,000 per year in lifetime annuity income, meaning that up to $20,000 could be excluded from taxable income. Reps. Ginny Brown-Waite, R-Fla. and Earl Pomeroy, D-N.D. introduced a similar bill in the House, the Retirement Security Needs Lifetime Pay Act. Sounds good but don't hold your breath!

CAP AND TRADE PASSES HOUSE – By a vote 219 to 211, the House passed a bill that will bring about one the most profound changes in our country's energy history. Regardless, of what side you are on "global warming," you have to be shocked by the process used by House leaders. The bill is now reported be 1,100 to 1,400 pages, but no one seems to know for sure. We do know that 300 pages were added at 3AM the morning before the vote.

HOME EQUITY IN RETIREMENT - The MetLife Mature Market Institute released a report calling for a "broader approach to help older Americans use their home as an asset to help deal with the growing uncertainties of retirement."  Click here for a copy of the report.  

COLLEGE COST REDUCTION AND ACCESS ACT - Legislation passed in 2007 to help make student loan debt has resulted in the creation of the new Income-Based Repayment program that became effective July 1.  This new option caps student loan repayments based on an individual's adjusted gross income and provides incentives for public service work.  More information is available at the Federal Student Aid Gateway.  

$85K PER MONTH - SIFMA (Securities Industry and Financial Markets Association) is reported to be spending $85,000 a month "on a new lobbying campaign to convince the public that Wall Street embraces regulatory reform."  Since, according to the Harris poll cited earlier, only 4% of the American public find Wall Street "honest and trustworthy," it looks like SIFMA has their work cut out for them.

SAVING AND SPENDING - The Commerce Department reports that the U. S. saving rate, which was near zero early last year, rose to 6.9%, the highest level since 1993. Also, 0.3% increase in consumer spending for the month and a jump in incomes of 1.4%.

MILLIONAIRES DOWN 19% - A Merrill Lynch reveals that the number of high net worth individuals, those with assets of $1 million or more, plummeted by a record 19.5% in 2008 to 8.6 million worldwide. In 2007, the millionaire ranks totaled 10.1 million worldwide. Millionaires' collective assets fell to $32.8 trillion, down from $40.7 trillion in 2007. FYI, about 2.5 million of these are in the U.S.

NET WORTH: HOW DO YOU STACK UP? - Want to see how your net worth (or that of your clients) stacks up against others of your age and annual income?  CNNMoney has a calculator that will let you know!  

RECESSION ENTREPRENEURS - With fewer jobs available and more people feeling shut out of the labor market, many would-be 9-5ers choose to go out on their own. While it may be difficult to get off the ground, some start-ups are flourishing in the current economic climate. Here is an interesting statistic...more half of the companies on the current Fortune 500 began during a recession.
 
SCHWAB WAIVES RIA FEES – In an attempt to increase their independent advisers business and help the RIAs capture assets from full-service brokers, Schwab is waving all fees for RIA clients.

KIDNAPPED AND BEATEN - InvestmentNews reports that a German financial adviser was kidnapped and tortured for four days by clients, all in their 60s and 70s, who lost $2 million through investments the adviser made for them in Florida real estate.  

BUILD AMERICA BONDS – Apparently, the federal government is paying a portion of the interest on Build America Bonds. SIFMA says, "It's been a beneficial program that has supported municipal bond issuers during this time of economic dislocation with the understanding that it's a temporary program..."

TOLL CZAR – A proposed bill would create a federal office to supervise the ability of municipalities to enter into public-private partnerships ("P3's") and charge tolls for highways financed using federal funds. The bill defines P3 agreement terms, and the office would approve or deny plans for highway toll rates. 
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