© Copyright 2007
US FlagAugust 15, 2007 Edition


EXPERTS FINALLY AGREE – In doing our research for E-News, we can almost always find expert opinions that are diametrically opposed to each other. This week, all the experts agree, but the agreement isn’t good news. They all say the mess in the subprime-mortgage market is spreading...especially to Europe. Germany is said to be facing its worse financial crisis since the 1930s.
 
BUYOUT BUST – With credit drying up, a major driver of the market gains, corporate buyouts are likely to decrease substantially and make for a “long August.” Just another fallout from what is, unfortunately, the still growing subprime mess. Some casualties could include the planned private equity deals for Home Depot and Sallie Mae.

THE MARKET AND THE FED - The U.S. Federal Reserve pumped about $38 billion into the banking system to reassure investors and stop spreading credit problems. The infusion was the most money put into the banking system on a single day since 9/11, with a $50.35 billion infusion on 9/19/2001. The central bank’s reason was that it anticipates some banks might encounter difficulties amid the current market turmoil.

WORLD CENTRAL BANKS REACT - Central banks worldwide have now injected over $325 billion in the last few days to prevent markets from spinning into a global liquidity squeeze. President George W. Bush said, “I am told there is enough liquidity in the system to enable markets to correct.” Let’s hope so.

RATE STAYS AT 5.25% - The Fed held interest rates at 5.25%, offering no hints of an interest rate cut, but did acknowledge for the first time that current credit-market turbulence threatens economic growth.

HOWEVER – There is speculation that the Fed may execute an emergency cut in interest rates because the steps central banks have taken to pump cash into the markets may not be enough to avert a credit collapse.  With his emphasis on fighting inflation, however, Fed Chairman Ben Bernanke may not feel excessive pressure to cut rates in response to the liquidity issue.

JUST HOW BIG IS IT? - Financial News estimates that concerns about subprime mortgage markets has wiped out more than $860 billion in stock market value of financial firms in Europe and the U.S. The unknown is just how much further the turmoil will spread and how much deeper the effects will be.

HIDDEN SUBPRIME LOSSES – The SEC is looking at the finances of leading Wall Street firms to see if they are hiding losses from the collapse of the subprime-mortgage market.

INSIDERS SAY THIS ISN’T THE “BIG BEAR” - An analysis by Argus Research of corporate insiders’ trading behavior indicates that the recent stock market decline is most probably only a minor downturn and not the beginning of a major bear market. This despite the fact that for the year to date, corporate insiders have sold more than 15 shares of their companies’ stock for every one they have bought.

INSIDER TRADING - The SEC has made insider trading a priority but is in a catch up mode, trying to do so amid the huge growth in hedge funds. They have opened numerous insider-trading cases, but highly sophisticated trades and traders have been making it more difficult find the cheaters.

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KATRINA CLAIMS PAID AT $40.6 BILLION - The Insurance Information Institute (III) reports that nearly all Katrina claims have been settled and the cost is a staggering $40.6 billion to policyholders on 1.7 million claims for damage to homes, businesses and vehicles. Hurricane Andrew’s wrath in 1992 caused a then record of only $15.5 billion in losses.

KATRINA FLOODS NOT COVERED - A U.S. appeals court ruled that three major insurers are not responsible for flood damages in New Orleans — even if “negligence” caused flooding that inundated the city during 2005’s Hurricane Katrina. “Regardless of what caused the failure of the flood-control structures that were put in place to prevent such a catastrophe, their failure resulted in a widespread flood that damaged the plaintiffs’ property. This event was excluded from coverage under the plaintiffs’ insurance policies, and under Louisiana law, we are bound to enforce the unambiguous terms of their insurance contracts as written.”

UBS UNDERPAYING BROKERS - A class action lawsuit against UBS claims that an error in the firm’s accounting system under-compensated brokers. “The attempt to essentially fit a fixed compensation rate in a rounding commission system resulted in an error in which UBS materially under-compensated the brokers,” said Alan Block, a partner at Block & Landsman. Hope it doesn’t end up like a class action in Texas some years ago where an insurer rounded pennies down for simplicity...the lawyers got millions and the most any plaintiff got was about $37.

FINRA PAYOFF – Broker-Dealers and member firms of the newly created Financial Industry Regulatory Authority (FINRA) are each receiving the $35,000 that was promised upon completion of the merger between NASD and the NYSE’s regulatory unit.  Critics of the merger called the money a bribe and we assume proponents say it will help defray the cost of compliance changes brought about by the merger.

FINRA (FORMERLY NASD) REVIEW EYES SECTION 72(t) - FINRA has started an investigation as to how broker/dealers are using Section 72(t), which allows clients to withdraw money from their retirement accounts before turning 59-1/2 years old. About 10 firms are being queried about seminars and/or additional events “directed at potential or early retirees,” including prospects younger than 59-1/2. We're not sure what FINRA is looking into. 72 (t) is in the tax code; assuming the regulations are followed, there shouldn't be a problem.  We suspect the problem lies with misleading sales materials.  Click here for the FINRA Investor Alert on this topic.

METLIFE LATE TRADING FINE - General American, a unit of MetLife, will pay a civil penalty of $3.3 million for its role in a late-trading scheme. A former senior vice president will also pay penalties totaling $163,137 to settle charges that he entered into a written agreement giving a wealthy New York family exclusive late-trading privileges in mutual funds underlying private placement life insurance policies. An SEC official said no action was taken against the family.

MORE DEMERGERS - Top executives at the world’s largest companies expect a rise in “demergers” over the next year as shareholders pressure companies to focus on core activities and unlock value.

BISYS LIFE AND RETIREMENT IN CRUMP GROUP – After purchasing BISYS, Citigroup is keeping the BISYS mutual and hedge funds units, but it has sold the old BISYS life, retirement services and commercial insurance operations to J.C. Flowers, owners of the Crump Group. Crump will run the BISYS life and retirement services divisions as separate divisions.

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PPA OPPORTUNITIES – The Pension Protection Act opened the door for financial professionals to provide investment advice to defined contribution plan participants.  While this provides business opportunities, it also comes with potential liabilities and administrative complexities.  In an effort to help financial professionals decide if taking on this expanded investment advisory role is right for them, The Principal has published a paper titled “Pension Protection Act of 2006: Is An Expanded Fiduciary Role The Right Choice For Financial Professionals?” 

WHEN A SPOUSE DIES - Grief and finances don’t mix. Here are 12 good guidelines for surviving spouses. 1. Take time to grieve. 2. Get organized. 3. Get good advice. 4. Know your benefits. 5. Take your time on major decisions. 6. Hurry up...the learning curve may be steep. 7. Get balanced. 8. Settle the estate. 9. Review your plan. 10. Get involved.  Here is an idea to help make this time easier for your clients. Send them a copy of VSA’s Financial Workbook. For a free copy, click here. If you want to provide customized copies to your clients and have your own Website, subscribe to the VSA at http://vsa.fsonline.com.

ANNUITIES IN 401(k) PLANS – Many financial planners will tell you to never put an annuity in a qualified plan...mainly because you are tax sheltering an already tax sheltered product. However, experts at Watson Wyatt are discovering that companies, faced with the possibility that a growing number of employees will outlive their income in retirement, will likely consider offering annuities as a new investment option in their 401(k) plans. “Current and future retirees will have to pay more attention to details than previous retirees did. Many will not only find they have not saved enough, but also will struggle with what to do with a lump sum payout they will have to stretch over the rest of their lives.”

ANNUITIES BEAT MUTUAL FUNDS – National Underwriter cites research from the University of Pennsylvania and Brigham Young University that individuals who use lifetime income annuities can fund a secure retirement with lump sums that are about 25% to 40% smaller than they would need if they were using other types of investments. See the article at http://www.smartmoney.com/.

INSUFFICIENT ACCESS TO HEALTH CARE - Consumer Reports says that 40% of Americans “still have poor or insufficient access to health care,” which forces them to pay out-of-pocket heath care costs. That number includes both insured and uninsured people. Well, we always thought of insurance as a way to prevent financial disasters, not to completely prevent people from having to “dip into savings or pull out the credit card to cover their health care needs.”

WHAT YOU NEED TO KNOW - MSN Money offers a checklist of 7 questions designed to help adult children get a handle on their parents’ finances:  1. What are their assets? 2. Do they anticipate needing financial support? 3. What types of insurance do they have? Do they have adequate health insurance? Long-term care insurance? Life insurance? 4. Who are their beneficiaries? 5. Will they share passwords and account numbers? 6. Have they signed a power of attorney? 7. Do they have an up-to-date will?

COMPUTER TRADING – The markets’ turmoil caused computer-driven trading strategies to force a Goldman Sachs’ hedge fund to fall 13.9% in the fiscal year ended July 31. Some think the reverse was also true...maybe the computer trading added to the turmoil.

QUANTITATIVE STRATEGY – Fund managers using the quantitative strategy of attempting to profit from pricing inefficiencies identified through mathematical models saw their funds fall 15% in the first few days of August. Predicting the unpredictable has always been tough.

FOR HIGH ROLLERS ONLY – If you have at least $100 million in assets, Nasdaq is set to launch a new private stock market just for you.  The new platform, called the Portal Market, is open to any private firm that wants to list on the market and still remain private, not having to make public their financial statements or be subject to federal regulation.  More information is available from the Washington Post. 

CORPORATE TAX CUT? – President Bush has indicated he may support a plan to cut corporate tax rates in order to make U.S. corporations more competitive around the world.  One way to pay for an across-the-board cut in corporate tax rates would be to eliminate targeted tax breaks, such as the R&D tax credit.  How such a proposal would fare in the Democratic Congress remains to be seen.

GST RULES – The IRS has issued a final rule dealing with the division of generation-skipping trusts through a “qualified severance” in order to treat the trusts as separate trusts for generation-skipping tax purposes.  A copy of that rule can be found by clicking here.  The IRS also issued a proposed rule dealing with situations where the split of a generation-skipping trust does not qualify as a “qualified severance” under federal law, but does create separate trusts under state law.  A copy of the proposed rule can be found here. 

HOME MORTGAGES HARDER TO GET – The current credit crunch will likely make it harder for prospective homeowners to get loans...especially those with even minor credit problems. This is not good news for the already stumbling housing sector. Loan money was plentiful last year, when it is estimated that investors bought more than $2 trillion in mortgage-backed securities, lulling some lenders into easing their standards.

HEDGE FUNDS DOWN – For the last week in July, the Hedge Fund Research index fell 3%. That was the second-worst week in four years for hedge funds.

YOU MEAN I’M NOT GOING TO LIVE FOREVER? - Uh, no. But if you take care of a few key financial tasks now, you can go back to pretending you will. Great article by Dan Kadlec of Money Magazine. Check it out at http://money.cnn.com/.  Once again the VSA comes to the rescue! Send a copy of VSA’s Financial Workbook to all your clients who think they are going to live forever.  Get free copies here. If you want to provide custom copies to your clients and have your own Website, subscribe to the VSA at http://vsa.fsonline.com.

NET DRIVING AUTO INSURANCE RATES DOWN – According to a Canadian report, competition on the Net is driving auto rates down. The report noted how American auto insurers, continually jockeying with each other for online prominence, continue to show a strong commitment to their customers by making sites accessible and usable to many different types of users. Who is selling the most online?  GEICO and Progressive tied for the lead, marking the fourth study in a row in which Progressive came out on top. GEICO rose from its fourth-place showing in the previous report. American Family showed the most improvement overall from the past study.

TREASURY NOTE HIGH - Merrill Lynch projects that 10-year notes will return 5.3% this year. That is the best return on Treasury notes since 2002.

RETIREMENT AGE FLEXIBILITY – The IRS has provided guidance giving employers more time to comply with regulations determining when plan participants can begin receiving benefits.  This flexibility is aimed at industries that frequently have normal retirement ages younger than age 62, such as construction and manufacturing companies.  A copy of the IRS notice is available at http://www.irs.gov/.

THREE-LEGGED STOOL BROKEN – The old three-legged stool used to describe retirement security has become a one-legged stool. One of the stool’s legs is a company pension, a second from Social Security benefits and the third leg from personal savings. The stool is becoming pretty wobbly because future retirees can’t depend on company pension plans or Social Security. People truly can count on only one leg of the stool – themselves and their personal savings.

FOUR-LEGGED STOOL - The Fourth Pillar: Retirement Choices white paper by Prudential Financial presents the “Four Pillars of U.S. Retirement” concept. It has its origins in the traditional “three-legged stool” described above: Social Security, employment-based plans and personal savings. Prudential adds a fourth pillar to the model - retirement choices - which are the lifestyle and financial options available to the retiree. We think that this fourth leg is a good addition, but we still believe we are then down to just two legs!

INDIVIDUAL APPS DOWN - MIB reports life applications received in June were down 2.7% compared to the year before. This continues a trend of decline since March 2006.