FSO E-NEWS WEEKLY

July 15, 2009 Edition

HEALTH CARE LEGISLATION UPDATE - The House of Representatives is pursuing their version of health care reform legislation on a joint "tri-committee" basis, meaning that the legislation proposed by three House committees will be the reform package considered by the entire House. Over on the Senate side, the Senate Health, Education, Labor and Pensions Committee (the HELP Committee) is developing its version of a health care reform package, while the Senate Finance Committee is completing its version of the legislation. At some point, the HELP and Finance Committees will have to merge their proposals into a single package of legislation to then be considered by the full Senate. For additional information, click here to review NAIFA's side-by-side comparison of the three Congressional reform packages, together with NAIFA's recommended approach to health care reform.

AGENT "FLY-IN" - A thousand members of the Independent Insurance Agents and Brokers of America, the National Association of Health Underwriters, the Council of Insurance Agents and Brokers, the National Association of Insurance and Financial Advisors, and AHIA (NAIFA's health insurance affiliate) flew into Washington on July 15 to lobby members of Congress and their staffs on health reform.

PERFECT STORM 1 - HEALTH CARE/TAX - On the eve of the July 15 Joint Agent Health-Care Fly-in, the House Ways & Means Committee released its proposed package of revenue offsets for the $1 trillion plus cost of the tri-committee (House) health care reform bill. About half the total offsets would come from savings in the cost of Medicare (including significant cuts in the Medicare Advantage program). The other half comes from new taxes. In addition, the Senate HELP Committee has adopted an amendment to its version of a health reform bill that changes the character of its "Navigator" structure. Click here to view NAIFA's GovWatch on these issues.

HOW CAN ANYONE BE AGAINST UNIVERSAL HEALTH CARE? - Here is one expert's answer. "On the surface, I too, feel the warm fuzzies that the thought of guaranteed health care for everyone provides...But then we have to deal with the realities of life. I divide my reasons for being against Universal Health Care as follows: 1) Historic and Economic Reality; 2) Government Inefficiency, Waste and Virtually Unlimited Demand; 3) Government Bureaucracy Rationing vs Free Market Forces and Charity; 4) Suppression of Creativity, Invention and the Attraction of Talent; 5) Fundamental change in the relationship between Citizens and Elected Officials; 6) Erosion of Liberties and Impairing the Freedom to Dissent and Criticize Elected Officials. See complete article by clicking here.

CBO ON HEALTH-JOB CONNECTION - "Although economic theory and experience provide some guidance as to the effect of specific provisions, large-scale changes to the health insurance system could have more extensive repercussions than have previously been observed and also may involve numerous factors that would interact, affecting labor markets in significant but potentially offsetting ways. The CBO health insurance impact report is available here.

QUESTIONING THE FED'S POWER - Two economists with longstanding ties to the Federal Reserve warned Congress that it would be a mistake to make the Fed a super-regulator in charge of reining in "systemic risk" and financial institutions considered "too big to fail." In what is shaping up as a political battle over a crucial part of President Obama's plan to overhaul financial regulations, the economists told a House panel that the Fed had consistently failed to recognize financial catastrophes until they were well under way. "I do not know of any single clear example in which the Federal Reserve acted in advance to head off a crisis or a series of banking or financial failures," said Allan H. Meltzer, professor of political economy at Carnegie Mellon, the author of a history of the Fed. FYI, more than 250 Republicans have co-sponsored a bill by Representative Ron Paul of Texas that would allow the Government Accountability Office, an arm of Congress, to conduct "audits" of Fed decisions on monetary policy.

ANGELIDES COMMISSION - Phil Angelides, a former California treasurer, has been named to lead a commission to examine the causes of the financial crisis. The commission consists of 10 members, six appointed by Congressional Democrats and four by Congressional Republicans. According to The New York Times, "The commission was created by Congress to investigate the roots of the crisis and lawmakers gave the commission a broad mandate, as well as subpoena power, to look at issues like the role of exotic financial instruments and credit rating agencies, compensation, and the failure of regulators to manage risky lending at banks." The commission is supposed to issue a final report by the end of 2010, another reason for any overhaul of the financial regulatory system to be delayed beyond this year.

PERFECT STORM 2 – FINANCIAL SERVICES REGULATORY REFORM – On July 14, two hearings were held to address enhancing consumer protections in the financial services marketplace. The first hearing, held in the Senate Banking Committee, addressed the Administration's proposal to create a Consumer Financial Protection Agency (CFPA). On the House side, the Financial Services Committee heard testimony from Securities and Exchange Commission Chairman Mary Schapiro regarding the SEC's agenda – including the Administration's proposal to harmonize the regulation of broker dealers and investment advisors, and to impose a fiduciary standard on all IAs and BDs moving forward. Go to www.naifa.org to view NAIFA's GovWatch on these issues.

CREDIT AGENCY EXAMINERS - Credit rating agencies, such as Standard & Poor's and Moody's, are now being targeted by a squad of examiners set up by the SEC. The heightened supervision was ordered by SEC Chairman Mary Schapiro, who has also directed staff to consider bringing in new regulations, particularly to prevent companies from shopping around for favorable ratings. Ratings agencies have been widely criticized for their role in the financial crisis, particularly for assigning various mortgage-backed securities and other financial instruments top ratings only to see them turn into toxic assets. This is probably a good thing.

CAP AND TRADE – Here is a description that we have seen floating around. "Trading dirty air for clean air so the traders can make commissions."

IBD EDITORIAL: READ-THE-BILL BILL - Lawmakers voted on the stimulus and global warming bills without having read either. Eventually they'll vote on health care legislation that could fund unrelated items. Time to end this systemic fraud. The stimulus bill, signed into law less than a month after Barack Obama took office, reached 1,434 pages and will eventually cost the nation more than $1 trillion. Waxman-Markey, the global warming bill, passed the House last month after Democrats added a 309-page amendment at 3 a.m. the morning before the vote, bringing that package of nonsense up to 1,200 or so pages. The next piece of deception up for legislative consideration is the $1.6 trillion health care bill, a Washington lightweight at a mere 615 (make that 1000+, it has grown in a day!) pages. The Boston Globe reports that it contains a provision for funding walking paths, bike paths, streetlights, gym equipment and farmers' markets. See the complete article at ibdeditorials.com.

"SIGNIFICANT RISKS AND CHALLENGES" - U.S. Treasury Secretary Timothy Geithner announced (again) that it's likely the economy will face "significant risks and challenges" before experiencing a recovery. "We have a very powerful set of policies in place, coming on stream. I think there is a very good chance we will see the U.S. economy and the world economy get back to recovery, get growing again, over the next few quarters." You think?

CONFIDENCE DIPS IN JULY - According to the Reuters/University of Michigan preliminary index of consumer sentiment, the U.S. consumer confidence in July reached its lowest point since March...down to 64.8 from 70.8 in June. The index of consumer expectations, which forecasts six months into the future, fell to 60.9 from 69.2.

VENTURE CAPITALISTS CONFIDENT - The Silicon Valley Venture Capitalist Confidence Index, a quarterly survey of venture capitalists, shows that the majority believe that the worst of the financial crisis is over, but are not anticipating a rapid recovery in initial public offerings and deals this year. Some expect a comeback in venture investments in the "second half of '09 and early part of '10" but others in the industry believe investments will remain slow through 2009, with IPO activity remaining below the peak levels seen in recent years for an extended period.

AIG AND METLIFE TALKING - AIG is said to be in talks to sell its American Life Insurance Co (ALICO) unit to MetLife in a transaction that could help the stricken insurer raise more than $15 billion. ALICO operates in more than 50 countries, but generates more than half its revenue in Japan. Shares of AIG have fallen 43.5% this month, after the insurer conducted a 1-for-20 reverse stock split. AIG suffered another setback when a jury rejected its argument that former Chief Executive Hank Greenberg improperly took $4.3 billion of company stock.

ANOTHER TRILLION DOLLAR BAILOUT? PUBLIC PENSIONS - Public pensions in the U.S. had total liabilities of $2.9 trillion as of Dec. 16, according to the Center for Retirement Research at Boston College. Their total assets are about 30% less than that, at $2 trillion. With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion. See complete article at www.bloomberg.com.

YET ANOTHER? GOVERNMENT HEALTH CARE LIABILITY – As of February, 2008, state and local governments have promised, but not paid for, roughly $1.5 trillion dollars in retiree health care. Yes, it is unfunded.

U.S. DEBT – This is mind numbing. See the U.S. Debt Clock at www.usdebtclock.org. Here are a few key ones:

Public debt per citizen...$37,322
Private debt per citizen...$23,418
Unfunded liabilities per citizen...$189,110
Estimate of unfunded government pension per citizen...$5,000
Estimate of unfunded government health care per citizen...$3,700.

The whole debt position of our country adds up to a stunning $250,000 plus for every man, woman and child in this country.

CASH FOR CLUNKERS A HIT – The $1 billion federal "Cash for Clunkers" program that pays consumers $3,500 or $4,500 in credit to swap aging gas-guzzlers for new, more fuel efficient models, is becoming a hit with car dealers and buyers alike. The program signed into law by President Obama in June offers a trade-in credit of up to $4,500 to owners of cars built since 1984, with fuel economy of 18 miles per gallon or less. Details of eligibility are available at http://www.cars.gov.

MOST COUPLES DISAGREE ON RETIREMENT - A study by Fidelity Investments found that more than 80% of couples disagree about a major component of their retirement planning, such as the age at which they plan to retire, whether they'll work in retirement or where they'll live after they retire. If the economic downturn has forced people to rethink their plans for retirement, it's a good idea to discuss your concerns with your spouse or partner. Bet that makes for a solid marriage. You can help! See Retirement and Social Security and Thinking About Retirement?. Both are part of The Virtual Assistant's phenomenal Life Guide Series.

MILLIONS OF RETIREES TO RE-ENTER THE JOB MARKET – According to Charles Schwab, 9.5 million retired Americans are considering returning to work at least part-time and 32% of currently employed Americans expect to hold onto their jobs and delay retirement. Clients who are thinking about rejoining the workforce should consider stopping Social Security payments until after they stop working permanently. In general, it is worth about 8% a year in future benefits for every year Social Security is not taken.

LTC COSTS - A new study by the Kaiser Commission on Medicaid and the Uninsured finds that cost and complexity are major deterrents to those purchasing long term care insurance. Annual premiums for a typical policy for a 60-year-old averaged about $2,300 for an individual and more than $3,000 for a couple in 2008. For a 70-year-old, $4,500 for an individual and more than $6,000 for a couple. Most popular plan?...Pays for a comprehensive array of services, covers up to $150 a day for three to five years, a waiting period of 90 days and automatic compound inflation protection of 5%.

CLASS ACT - One of the Senate health care reform packages contains a provision titled the Community Living Assistance Services and Support Act, or CLASS Act, creating an optional LTC program that would pay a minimum LTC benefit of $50 a day, or about $1,500 a month. The initial premium would be $65 a month in 2011, indexed for inflation in future years. To qualify for benefits, however, an enrollee would have to first pay premiums for at least five years. Here's a real concern...while this program builds up reserves during its first five years by paying no benefits, will politicians have access to the reserves, as they do to Social Security reserves? Also, will there be the political will to keep premiums at a level to adequately fund the program, or will we be creating yet another entitlement program?

INSURERS AS INNOVATORS - Here are a couple of articles from BusinessWeek, claiming that the "insurance industry is poised to assume the leadership position when it comes to creating new products, services, and business models in our economy." The articles, however, go on to discuss a failing of the insurance industry...a failure to communicate. Interesting reading:

SCHAPIRO FLEXES MUSCLES, STUDIES FUND FEES – Chairman Schapiro has been lobbying members of Congress in a bid to preserve the SEC as the country's top securities markets regulator and investor protection agency. Unlike many other financial regulators, the SEC would not lose authority under the Obama administration's regulatory overhaul proposals. Schapiro also said she has asked staff to prepare recommendations on mutual fund distribution fees known as 12b-1 fees, which allow funds to use fund assets for distribution and servicing costs, saying the fees are not well understood by investors.

VARIABLE ANNUITY FEES UP – A Symetra Life Insurance review of 10 of the largest variable annuity providers found widespread increases in the fees charged to customers, reductions in guarantees and benefits offered under many riders and sometimes the elimination of an entire guaranteed living benefit offering. "VAs can and will continue to play a role in building retirement income as markets recover. That is why now, at such a critical juncture for our industry, it is so important to give customers a dependable selection of VA options and not surprise them with fees and features..."

BROKER-DEALER RAIDS - Recent personnel raids at broker-dealers have sparked ugly and bitter feuds and led to significant damage awards, and financial industry attorneys and experts predict more to come. Last month, a FINRA arbitration panel ordered Morgan Stanley, along with some employees, to pay $1 million in damages to a small regional broker-dealer for taking its president and five top-producing brokers. Even the "big boys" are getting into the act. The arbitrators ordered independent broker-dealer Park Avenue Securities (a subsidiary of The Guardian) to pay $20 million in damages, plus interest, and attorneys fees, for raiding brokers and staff of MetLife.

401(k) CHANGES - According to a U.S. News & World Report article, employers are planning changes to their 401(k) plans to save money. The changes include reducing automatic enrollment, provide more 401(k) investment advice, eliminating or reducing the employer match, increase use of automated services, and begin offering funds with lower operating expenses.

IMF SEES RECOVERY ON THE HORIZON - According to the International Monetary Fund (IMF), the worldwide economy is beginning to recover from recession, although a full recovery will take some time and require continued support from governments and agencies. The IMF says the global economy is expected to contract 1.4%, but predicts that the economy will grow 2.5 % next year. Remember, however, these are the same folks who didn't see the global collapse coming.

WTO: RECESSION FAR FROM OVER - According to the World Trade Organization (WTO), the global economic crisis is far from over. The WTO says import penalties and other border restrictions are sealing off markets and causing further roadblocks to already decreased levels of demand. "There is no indication yet of governments more generally unwinding or removing trade-restricting or distorting measures that they imposed early on in the crisis." Remember, however, these are the same folks who didn't see the global collapse coming.

OFFICE VACANCIES AT 4-YEAR HIGH - Reis Inc. reports that the office market in the U.S. saw its vacancy rate reach 15.9% during the second quarter, the highest level in four years. In addition, rent fell by the largest amount in more than seven years, due to diminished demand. "It's bad. It's decaying and getting worse. Given the depth and magnitude of the recession, you can argue that we are facing a storm of epic proportions and we're only at the beginning." Sounds pretty ominous. The only question we see is will commercial real estate and/or a credit card collapse become the next housing crisis?

SMALL BUSINESS BAILOUT - Under pressure for not doing enough to fix the economy, the Obama administration is now considering allowing small businesses to access the government's $700 billion bailout kitty. Under the proposal, the administration would use money from the TARP to expand a Small Business Administration program for small-business loans.

CAUTIOUS YOUNG PEOPLE – A Northwestern Mutual poll of 2,400 Web users who visited www.themint.org earlier this year reveals that young people may be feeling more cautious about their finances these days. Visitors were asked the first thing they would do if money got tight. About 66% of the survey participants ages 17 and younger said they would either spend a little less or stop spending money on unnecessary items altogether. About 29% of the participants said they would prefer to "earn more" by getting another job or working more hours instead of "spending less" or "donating less." 15% of the participants ages 18 to 29 said their first choice would be to work more, but just 3% of participants ages 30 to 59 gave that response. Looks like the older folks are lazy.

TAX CODE AT 70,000 PAGES – If you are looking for a way to judge just how many pages this is, the Code is now about five times larger than all the 1909 edition of Harvard Classics. The "Classics" may be bigger now, but the 1909 edition is the only one in my office. FYI, the tax code was started in 1913 with just 14 pages. Over the years, the Code has become the politicians' "weapon of choice."

MORTGAGE RATES DECLINE – 30-year fixed mortgage rates decreased last week to 5.26%, down from 5.40% the week prior; 15-year fixed mortgages fell to 4.65% from 4.79%.