Financial E-News 07/15 Edition

July 15, 2006 Edition

RISE AND FALL - In a rise and fall worthy of a Shakespearean tragedy, Kenneth Lay, the former Chairman of Enron, died earlier this month at the age of 64 while awaiting sentencing for his role in the Enron scandal. Besides the fall of Enron and his conviction for massive fraud, he leaves behind not only a legacy of shame, but also an unexpected legacy...regulations, reforms and procedures designed to prevent another financial disaster. Since he had not yet been sentenced, Lay's death voids the guilty verdict against him and temporarily halts the government's actions to seize his remaining assets. While some say his death might save his family from financial ruin, his estate remains subject to civil lawsuits by the SEC and former Enron investors and employees. Continuing the Shakespearean theme, a British banker questioned in connection with the Enron fraud investigation was found dead in a London park in an "apparent suicide" and, after a two-year fight to avoid extradition, three British bankers arrived in Houston last week to face charges of wire fraud in connection with Enron fraudulent transactions.

MERRILL SETTLES ENRON "ISSUES" - Merrill Lynch has agreed to pay Enron $29.5 million to settle lawsuits related to its role in the scandal. The litigation is one of the first against several financial institutions regarding actions taken during the energy company's demise. Merrill also agreed to give up $73.7 million in claims against Enron.

SEC AND "SOFT DOLLARS" - The SEC issued new rules and tougher rules on "soft dollars," banning the use of clients' funds to pay for things such as office space and computer equipment. "Money managers have an obligation to use soft dollars to obtain real brokerage and research services for the benefit of investors who entrust their money to them."

CREDIT RATING COMPANIES TO BE REVAMPED - House lawmakers passed a bill allowing SEC oversight of the credit-rating industry. The move comes after 25 years of the SEC trying to reform the industry. Expect more than the current "big three" companies at some point in the future.

COST CUTS FOR COMPLIANCE – The SEC will attempt to lower the cost of complying with the Sarbanes-Oxley Act by making the corporate-oversight regulation less onerous. No details as yet.

INSURANCE INDUSTRY DYSFUNCTIONAL? - That is the claim of the Senate Banking Committee. The committee has begun a series of hearings on modernizing insurance regulation and whether insurers should be given the option of being federally regulated. As one Senator put it, "The status quo is unacceptable, redundant, inefficient, burdensome, complicated, duplicative, costly, dysfunctional, anachronistic, balkanized, contradictory, deficient, and counterproductive." Hmm...hard to understand how the industry even exists under those conditions!

WACHOVIA TO PAY $25 MILLION – Wachovia has joined with 12 other financial institutions that have paid about $1.4 billion to settle charges that their research analysts issued biased reports to boost business. The deal involves regulators in all 50 states and will cost Wachovia $25 million.

TOTAL MEDICAL COST STILL RISING – Milliman reports that the average annual medical spending for a family of four rose to $13,382...about a 9.6% increase from the prior year and right on the annual growth rate of 9.7%. The same family pays about $2,200 out of pocket for a typical PPO plan.

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BACKDATED STOCK OPTIONS - According to a study by two professors, more than 2,000 companies appear to have backdated stock options in order to boost executive pay. More than 60 companies have already disclosed that they are targets of government investigations and that may be just the tip of the iceberg.

INSURANCE INDUSTRY BIG AND GROWING – Swiss Re reports that in 2005 the worldwide insurance industry produced $3,426 billion ($1,974 billion from life and $1,452 billion from non-life) total premium. That is 7.7% of worldwide economic value. The firm forecasts that premium growth in life insurance is expected to continue in 2006.

CEO WANTS HEALTH CARE HELP – GM CEO urged a Senate Special Committee on Aging to enact health-care policy reforms aimed at easing heavy costs and improving affordable drug access. He asked for a "vigorous and robust competitive prescription drug market" and called for a stronger focus on high-cost cases, but stopped short of advocating government-sponsored catastrophic health-care coverage. GM lost $10.6 billion in 2005, with much of the loss attributed to funding benefits and pensions for retirees.

FEDS BUMP RATE - The Federal Reserve bumped up short-term interest rates another quarter point to 5.25% but, as expected, backed off the certainty of another increase. Instead, the central bank said its next move would depend on economic and inflation indicators. Also, in the first increase in years, Japan increased their rate from 0% to .25%.

MORGAN STANLEY APPEALS $1.58 BILLION – Morgan Stanley will appeal a $1.58 billion verdict awarded to financier Ron Perelman in a lawsuit over the company's handling of Perelman's sale of Coleman to Sunbeam. With that kind of money at stake, you have to appeal!

AVIVA TO ACQUIRE AMERUS - Aviva has agreed to pay $2.9 billion in cash for AmerUs of Des Moines. The move will make the British company a major player in the U.S. equity-indexed life insurance and annuities market. Aviva had tried to acquire Prudential P.L.C., the parent of Jackson National Life, earlier this year. Plans are to combine all of Aviva's U.S. operations with those of AmerUs and to locate the headquarters in Des Moines.

EXPENSIVE BUFFET WITH BUFFETT - Investor Yongping Duan's $620,100 was the winning bid in a charitable auction to have lunch with Warren E. Buffett, according to published reports. Nice gesture and we bet it won't be at Burger King!

PROTECTIVE PURCHASE - Protective Life has closed on its $1.2 billion purchase of Chase Insurance Group, previously part of a large bank holding company.

CAN'T SAY WE BLAME THEM - Goldman Sachs, a global investment bank, has filed a complaint with the National Arbitration Forum against a Netherlands man who operates goldmansex.com, a global adult entertainment directory. Goldman Sachs is concerned that the domain name may be associated with them.

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ONLINE TRADING FEES DOWN, DISCOUNT BROKERS UP - A wave of new companies and mergers among established ones has discount brokerages cutting fees to all-time lows. Following suit many banks and large fund companies have also reduced fees. Discount brokers have rebounded from the dot-com bust as customers are shifting more of their investment dollars and now control about 10% of Americans' financial assets.

SITTING IN COMMITTEE - It's pretty easy to report on Congressional action these days...there's very little. Bills now sitting in committee that are of interest to the financial services industry include long-term care tax breaks, corporate-owned life insurance reform and mutual fund transparency. An estate tax compromise continues to be out of the reach of Congressional negotiators, with Kiplinger predicting that "odds on an estate tax deal this year remain long." There is, however, hope that Congressional negotiators might be able to reach agreement on a pension reform bill this month.

RETIREMENT SECURITY AND FINANCIAL INDEPENDENCE – Well, we always thought retirement security and financial independence went together like "love and marriage." Not so says Allstate's 2006 Retirement Reality Check. The survey reveals that 70% of respondents describe themselves as financially independent, but 40% are not taking retirement saving seriously. While 26% of baby boomers say financial independence means having the means to live as long as possible, just 15% Gen Xers say the same. For them, financial independence means not having to rely on others for money. Some folks are going to be in for a shock.

TIPS FOR FRAUD AWARENESS WEEK – It seems like we have a day, week or month for everything. (Someone needs to propose a Financial Planning Year.) During National Fraud Awareness Week, July 9-14, the National Crime Prevention Council (NCPC) reminded consumers of easy safety measures they can take to protect themselves against fraud and identity theft. Eliminate paper trails (some identity thieves "dumpster dive"); Sign up for direct deposit (especially for Social Security payments); Protect your personal information (legitimate businesses will never ask you to provide or confirm any personal information through an email); Check your credit report (it is free once a year); Stay alert in public places. For more information on how to protect yourself from fraud and identity theft, visit the National Crime Prevention Council online at www.ncpc.org.

PHONY GOVERNMENT REGULATION SITES – The NASD has issued a warning to investors about e-scams using bogus government regulator websites. Click here for more information.

ED JONES AND RAY JAMES TOP SURVEY – According to the Full-Service Investor Satisfaction Study by JD Powers, Edward Jones and Raymond James are one and two in customer satisfaction.

HEDGE FUND OVERSIGHT - A federal appeals court overturned a rule requiring hedge fund advisers to register with the SEC as investment advisers. It is unlikely the SEC will appeal the ruling, punting the subject of hedge fund regulation to Congress. While legislation has been introduced in the House that would give the SEC clear authority to require hedge fund registration, there is some doubt that the bill can pass both chambers before the recess for fall elections.

ANNUITY AWARENESS LOW – A Guardian Life study indicates that baby boomers might be more inclined to buy annuities if they knew more about them. Baby boomers ages 50 to 59 were surveyed and only 14% owned annuities and half of the participants without annuities said they did not know enough about annuities to consider purchasing.

HUMBERTO CRUZ - Humberto Cruz is a personal finance columnist who has been called everything from RoboSaver to tightwad. A Hispanic immigrant whose family came to the United States with only $300 in their pockets, Cruz has become a savings strategist who has amassed a net worth of more than a million dollars and we are seeing lots of his articles that might be of interest to your clients. Two recent ones are "Insurance Products Can Help Your Money Last As Long As You Do" and "How to Create Your Own Retirement Spreadsheet." Check them out and, if appropriate, send them to clients and prospects.

TRENDS SHAPING SALES AND SERVICE - According to TowerGroup, four trends will affect the way an insurance company does business over the next few years: The Aging Populace, Mobile Technology, Service-Oriented Architecture and Workforce Motivation. More information is available on TowerGroup's Web site: www.towergroup.com.

EIA COMMISSIONS COULD FALL – According to analysts at Fox-Pitt, competition from bank certificates of deposit and variable annuities are driving some consumers away from equity-indexed annuities. The slowdown in EIA sales and increasing regulatory scrutiny could force commissions down.

LARGE CAP MOVE? - Many advisers and fund managers are convinced that large-cap stocks are poised make a big move upward. We have heard that before, but many investment professionals are adopting a conservative approach to the market by increasing their holdings in large-cap companies.

SMALL CAPS TOO - Hoover points out that small cap funds may have had a disappointing quarter but don't forget them.