© Copyright 2007
US FlagSeptember 1, 2007 Edition


FIXES FOR THE MORTGAGE MESS - With the credit markets in turmoil and housing prices dropping, everyone is wondering what can be done to minimize the damage to the broader economy. Lots of proposals are shaping up, including action by the Federal Reserve to bolster market confidence, state actions to prevent local foreclosures and even a federal bailout for homeowners. As one proponent says, “If we can bail out Chrysler, why can’t we support the American homeowner?”  All of the possible solutions are politically loaded and some are impractical. We sure don’t know the soltions. The Fed may lower interest rates, in addition to the cut in the discount rate it’s already made. However, widespread foreclosures are probably  inevitable and we aren’t sure that having the government pay for greed and bad financial decisions, by homeowners and lenders alike, is a good plan.  “It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions,” remarked Fed chairman Ben Bernanke at the Federal Reserve Bank of Kansas City’s Economic Symposium on Friday in Jackson Hole, Wy.

PROTECTING RISK-TAKERS NOT FED'S JOB – The head of the Dallas Fed made his position clear on the turmoil caused by subprime mortgage problems.  “I don’t mind tears among individual market operators, as long as we don’t get tears in the fabric of the financial system. I do not believe the Federal Reserve’s job is to protect against the failure of specific risk-takers. Its job is to protect the system.”  Or, as someone else once put it, "sometimes risk is risky."

HOW BAD IS IT? - Foreclosures are up 93% from a year ago, with a 9% jump just last month, and about 40,000 have lost their jobs. Congress is considering a variety of measures, including bailouts for mortgage underwriters and borrowers. Some lawmakers, however, suggest the mortgage companies and borrowers should simply suffer the consequences of the bad loans. Whatever they do, they will be doing it with our money.

RATING FIRMS UNDER SCRUTINY – The credit-rating agencies that once blessed risky mortgage-based securities as safe investments are now in trouble.  Moody’s stock is down 40% from its 52-week high and Congress is calling for oversight of all the rating firms. Many observers are blaming the agencies for being months late in identifying the mortgage market implosion that has caused hedge funds to collapse and mortgage firms to lay off tens of thousands. Watch for continuing problems at the big three rating firms...Moody’s, Standard & Poor’s and Fitch.

MANAGEABLE RISK – Rating agencies are telling us that life insurance and P&C insurance company exposure to subprime mortages is “manageable.”  While these are the same rating agencies that once blessed mortgage-based securities as safe investments, let’s hope they’re right this time around.

FREDDIE MAC DOWN - Freddie Mac has a 45% decrease in net income in Q2 due to $320 million in losses on new mortgages. However, the CEO says, “On the credit front we are seeing weakening, but we are well positioned relative to the overall marketplace to weather the ongoing disruptions in the mortgage markets and emerge as an even stronger player.”

FOREIGN REGULATORS FOR U.S.? - The recent meltdown in the subprime-mortgage market has caused some foreign regulators and politicians to seek a say in the oversight of U.S. rating agencies, banks and markets. Don’t think it will happen, but there is no question that problems in the U.S. economy have worldwide implications.

MORTGAGES AND DEBT TRUMP TERRORISM - A survey by the National Association for Business Economics found that nearly one third of economists believe that debt-related problems are the top concern for the US...followed by mortgages and then terrorism.

H-E-D-G-E – In an effort to bring some levity to the current economic situation, we have Merle Hazard, a fictious hedge fund manager, lamenting the loss of his fund.  Check it out on YouTube. 

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CREDIT CARD CRUNCH NEXT? – There is concern that the end of quick money from home loans may lead to overuse of credit cards and create another financial squeeze. Tighter home-equity rules mean it will be harder to pay off big credit card balances and that could further strain markets. “We’re not going to be able to spend at levels well above our income levels,” said Carl Steidtmann, chief economist with Deloitte Research. Now that is profound.

BANK OF AMERICA BUYS COUNTRYWIDE - Bank of America has agreed to pay $2 billion to purchase preferred securities in troubled lender Countrywide Financial. BOA said it also has the right to match any competing buyout offer.

AVERAGE INCOME DOWN...OR IS IT? - The NYT reported that average U.S. incomes remained below their peak for the fifth straight year in 2005 and the average income was $55,238 in 2005, down 1% from 2000 after adjusting for inflation.  What the story notably failed to tell readers is that incomes have been on the rise since 2002, a fact that journalist James Pethokoukis gleaned from a different version of the story on the NYT website. Further, those figures are household income figures and reflect the increased number of households when children leave home. Average personal income is actually above the 2000 level.

PROVERTY RATE FALLS - The Census Bureau reports that the nation’s poverty rate fell in 2006 for the first time this decade, down to 12.3% from 12.6% in 2005. The results were not consistent across racial or age groups. For Hispanics, the poverty rate fell by 1.2%, while for whites, blacks and Asians, it remained statistically unchanged. For elderly people, the poverty rate was among the lowest since 1959, when the government began collecting such data.  That’s the good news.  The bad news is that more people are without health insurance, mainly because businesses cut back on benefits.  The number of uninsured increased to 47 million in 2006, compared to 44.8 million in 2005.  Only 59.7% of people were covered by employment-based health insurance in 2006, down from 60.2% in 2005.

364 TO 1 – That’s the 2006 pay gap between CEOs and workers.  The CEO of a large U.S. company made an average of $10.8 million in 2006, compared to an average of $29,544 for full-time and part-time workers.  Drop the part-time workers and you have average worker pay of about $40,000, dropping the pay gap to about 270 to 1.  This all pales by comparison, however, to private equity and hedge fund managers’ pay...an average of $657.5 million in 2006, roughly 61 times average CEO pay and 16,000 times what the average worker made.

MULLING A MERGER – TD Ameritrade and E*Trade are reported to be considering a merger, with the end result of creating a dominant player in online brokerage.

BEAR STEARNS FOR SALE? – With its stock in the tank (down 40%), rumors are that Bear Stearns is seeking a buyer, but the firm won’t confirm or deny.

TORT MOVE – The WSJ questioned the motives of Senate Banking Committee Chairman Christopher Dodd, D-Conn., when he asked the Administration not to oppose the SEC in a pending landmark Supreme Court decision that will determine whether bystanders can be sued for secondary liability in securities class actions. The paper says Dodd and other congressional Democrats may be trying to protect tort lawyers, who are also campaign contributors. “Happily, the Bush administration has reserved the right to make policy for itself -- and sent U.S. Solicitor General Paul Clement to argue a Justice Department position that contradicts the SEC.” 

SICKO – A Kaiser Family Foundation survey says 46% of Americans have either heard of or seen Michael Moore’s film “SICKO,” a documentary criticizing and examining the health care system and health care insurance companies in the U.S. Other findings: 37% left the film feeling that other countries had a better approach to health care and 27% say they now pay more attention to presidential candidates’ positions on health care.  Further, 26% felt the film accurately portrayed problems in the U.S. health system and 33% thought it exaggerated them. There was no indication what the remaining 41% thought, if they thought at all.

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MORE ON HOMEOWNER BAILOUT - Bill Gross, an influential bond manager, says the Bush administration and not the Federal Reserve should help homeowners caught in the mortgage meltdown. “Fiscal, not monetary policy should be the preferred remedy.  Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 Long Term Capital Management crisis, yet throw 2,000,000 homeowners to the wolves in 2007?”  It may be that someone in the White House is listening to Mr. Gross, since President Bush is proposing an initiative to help troubled homeowners avoid defaulting on their loans.  Any federal help, however, will not extend to lenders.

FORECLOSURE TAX IMPLICATIONS – When a lender forecloses on a home and is unable to recoup the full mortgage balance, the lender is required to file a 1099-C, Cancellation of Debt form with the IRS.  The amount of debt that is cancelled or forgiven is then considered taxable income to the homeowner.  Needless to say, this generally comes as quite a shock to the taxpayer receiving a bill from the IRS.  President Bush, however, is indicating his willingness to work on a bipartisan basis with Congress in order to reform the tax code to lessen the impact of the cancellation of debt requirements in order to help troubled borrowers rework their home mortgages.  Now let's see if Congress and the White House recall the meaning of bipartisan.

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CLIENT PRIVACY AND ACCOUNT TRANSFERS - Independent broker-dealers are asking the SEC for guidance concerning the use of private information about clients when brokers transfer accounts to another firm. Investment News has a good article on this conundrum faced by indie firms.  

NEW TWIST – Every now and then, we see proposals aimed at curtailing or eliminating the mortgage interest deduction.  Here’s a new twist though...Rep. John Dingell is reportedly planning to introduce legislation that would eliminate the mortgage interest deduction for homeowners with houses of more than 3,000 square feet of interior space (so-called “McMansions”).  The reasoning?  To discourage people from adding carbon emissions to the atmosphere...these larger houses consume an unreasonable amount of energy, consume more construction materials and contribute to urban sprawl.  This is one of the more kooky proposals we’ve seen.  Are we going to have an IRS home inspection division arriving to measure the square footage of our homes?  If the desire is to limit carbon emissions, then slap a carbon tax on gasoline and electricity...the more you use, the more you pay, but let’s not have federal regulation of the size of our homes.

LIFE EXPECTANCY PLANNING – The Fidelity Research Institute has released an interesting report on the need for life expectancy planning.  “Pre-retirees significantly underestimate the length of their retirement years and how long their savings will need to last.”  A copy of the report, Structuring Income for Retirement, is available here. 

GRUESOME RETIREMENT - That sounds like a very unsatisfying retirement, but according to the 2006 Retirement Confidence Survey (RCS), we can be confident that many people will have gruesome retirements.
Retirement Savings All Ages 25-34 35 - 44 45 - 54 55+
less than $25,000 53% 73% 49% 44% 42%
$25,000 - $49,000 12% 11% 14% 14% 8%
$50,000 - $99,999 12% 7% 16% 12% 12%
$100,000 - $249,999 11% 4% 12% 15% 12%
$250,000 or more 12% 5% 9% 16% 26%

ELECTRONIC ORDERS REDUCE COMMISSIONS – According to Greenwich Associates, half of all equity orders in the U.S. will be executed using electronic-trading before 2010. The trend has already had a substantial impact on brokers’ revenues as the commissions paid by institutional clients to brokers last year dropped for the first time in three years.

FINRA ON REPLACEMENTS - Earlier this year, FINRA gave notice that broker-dealers must keep close tabs on registered representatives who have been hired away from competitors and prevent the rep from replacing mutual funds, variable annuities and variable life insurance policies simply because the products were issued by the rep’s old company. Now FINRA says that insurers should be able to keep new reps from replacing existing customers’ variable annuities without using the customers’ personal information.

GOVERNMENT BONDS UP – “It is an ill-wind that blows no good” and the current credit crunch has forced investors to seek a safe haven in three-month Treasury bills. Some predict that the “financial markets will get uglier” and government bonds are one of the very few assets that will benefit.

BROKERS REVENUE OVERSTATED - Interviews conducted by Investment News indicate that several brokerage firms may be padding their revenue-per-broker to make themselves look better. One broker claims the B-Ds are in a race “to the million-dollar mark.”

SAFE TECH STOCKS? - Once the height of uncertainty, technology stocks have been a stabilizing factor during the fallout from the subprime-mortgage market.  Business Week calls it “an about-face from previous periods of market unrest, when tech stock would swing more wildly than the broader markets.” Reason: tech firms usually don’t carry much debt. 

RETIREE HEALTH CARE – The IRS is planning to draft regulations making it clear that payments from qualified retirement plans used to pay accident or health insurance premiums constitute a distribution that is taxable to the retiree.

HEALTH PLAN COST - According to United Benefit Advisors’ third annual employer-sponsored health plan survey, the average annual health plan cost per employee is currently $6,881. The average employee expense is about $3,100 and the average employer cost runs about $3,700.

IA SALES UP - AnnuitySpecs.com reports that index annuity sales in the second quarter were up 2.7% from Q2 of 2006. The $6.6 billion in the second quarter is the highest index annuities sales have been since 2005.

MORE ADVISORS TO BECOME 401(k) FIDUCIARIES - Principal Financial Group predicts that more financial advisers will specialize in becoming fiduciary advisers who work with 401(k) plans in coming years. The prediction and justification can be found a white paper titled “Pension Protection Act of 2006: Is an Expanded Fiduciary Role the Right Choice for Financial Professionals?” The paper can be found here.

REASONS FOR LTC – A study by Genworth shows the average hourly rate for a home health aide is $25.47 per hour, or nearly $53,000 per year for 40 hours per week. An assisted-living development costs, on average, $32,583 for a private one-bedroom, and a private nursing home room is $74,806 per year, or $204 per day. Taking inflation and medical costs into account, Boomers could easily be looking at $500,000 for five years of long-term care.

MYMONEY.GOV – “If you want to learn more about how and why to save, you should visit www.mymoney.gov, a federal government Web site dedicated to teaching all Americans the basics of financial management.”

DON’T ASK + DON’T TELL = SELL – That is how Bloomberg columnist Caroline Baum describes the lack of transparency in investment vehicles linked to subprime bonds that made it impossible for investors to assess the risk they were taking.

LET THEM EAT GLASS - After admitting he and his wife deliberately ate glass at restaurants to collect more than $100,000 from insurers, Ronald Evano is now facing 100 years in jail. The couple was treated for glass ingestion at least 12 times, collected money from insurance companies and never paid their hospital bills. His wife is still being sought for her part in the crime.  Talk about SICKOS!