September 15, 2009 Edition

FINANCIAL REGULATORY REFORM - Marking the first anniversary of the fall of Lehman Brothers in a speech on Wall Street, President Obama said "the storms of the past two years are beginning to break.  In fact, while there continues to be a need for government involvement to stabilize the financial system, that necessity is waning."  The president then went on to call for regulatory reform designed to prevent a similar collapse in the future.  Proposals include a new Consumer Financial Protection Agency, closing gaps and loopholes in the regulatory system and ending the "too big to fail" mentality by creating FDIC-like resolution authority for non-bank financial institutions.  SIFMA, in a press release, agreed that it is vital to create a systemic-risk supervisor and to expand resolution authority to wind down failing firms.

ECONOMY AND GOVERNMENT CONFIDENCE – In an AP poll, one year after Wall Street teetered on the brink of collapse, 7 out of 10 Americans lack confidence that the federal government has taken safeguards to prevent another financial industry meltdown, according to a new Associated Press-GfK poll. Even more (80%) rate the condition of the economy as poor and a majority worry about their ability to make ends meet. The pessimistic outlook sets the stage for President Barack Obama as he attempts to portray the financial sector as increasingly confident and stable and presses Congress to act on new banking regulations.

SYSTEMIC RISK - There appears to be wide-spread agreement on the need to create something along the lines of the proposed Financial Oversight Council, which would be charged with identifying potential system wide risks and improving coordination among existing regulatory agencies such as the SEC, the Federal Reserve Board and the FDIC.  For more background, read How Banks Should Manage Risk from BusinessWeek.  

SOUND FAMILIAR? - Wall Street is nothing if not creative.  According to the article Wall Street Pursues Profit in Bundles of Life Insurance, Wall Street investment banks plan to buy life settlements and "securitize" them by packaging hundreds or thousands together into bonds, which will then be resold to investors, who will receive the proceeds when the insured people die.  Whether or not investors make money, the investment banks would "profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them."

JUDICIAL REGULATION - Here's an interesting article from Bloomberg.com, Judges Punish Wall Street as Regulators Just Talk About Reform.  According to the article, "The executive and legislative branches have been discussing reforms such as more regulation of hedge funds and transparency for derivatives as a response to the financial crisis that began a year ago.  As that battle with a reluctant Wall Street inches forward about how to prevent another disaster, judges are taking the first steps toward the same goal, punishing executives and issuing rulings with national impact."  Notable rulings include throwing out the free-speech defense that credit rating agencies have used for years to thwart investors' fraud suits, imposing tough prison sentences for financial crimes and demanding more accountability from regulators.  Just recently, a federal judge threw out a proposed $33 million settlement between the SEC and Bank of America over bonuses paid by Merrill Lynch in 2008, calling the proposed settlement inadequate.

SEC DEFENDS BOA SETTLEMENT - Federal regulators defended their proposed $33 million settlement with Bank of America over bonuses paid by Merrill Lynch. But the Securities and Exchange Commission said the bank didn't waive attorney-client privilege, making it impossible to establish if its executives knowingly breached securities laws. BOA said that it didn't waive the privilege and said "there is no evidence that any individual is culpable."

SEND THEM TO JAIL - Voltaire once explained how the British executed one of their own admirals who lost an important battle...to encourage the others not to dare repeat such a public failure. Fining shareholders certainly doesn't accomplish this.  At present, there has been nothing remotely like that level of accountability for the Wall Street executives who led their firms (and nearly American capitalism) into the financial abyss.  In such previous scandals as Enron and WorldCom, top executives went to jail, but this situation is less clear-cut in part because Wall Street was just playing by the regulatory rules that it helped write. Only two men, Ralph Cioffi and Matthew Tannin, who managed Bear Stearns hedge funds that went bust, have been indicted on criminal charges.  Reports are that government investigators are probing executives of AIG's Financial Products unit for securities fraud for failing to disclose the value of toxic assets to the company's outside accountants and shareholders.

TRIAL AND ERROR - What's the verdict to date on government efforts to prevent what could have been another Great Depression.  According to a Wall Street Journal article, the early verdict from most scholars, executives and government insiders is that governments and central banks deserve credit for preventing catastrophe.  There's less agreement, however, on which of the many government interventions made the biggest difference.  As one economist put it, "It was a period of tremendous experimentation.  When you're faced with a crisis of this magnitude, if you take the view that every measure that we take has to be exactly right, you don't do anything."  
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STOCK SALE? - Reports are surfacing that the Treasury Department may begin selling its (our) shares in Citigroup as soon as October.  With a 34% stake in the company, there are a lot of shares to sell (7.69 billion common shares to be exact).  The government currently holds a $9.77 billion paper profit on those shares, so it looks like we the people will turn a profit.  More information is available at Bloomberg.com.  

FINANCIAL-REGULATORY COMPLEX – Here's an excerpt from a NYT article:  "President Eisenhower warned of a military-industrial complex. Today we have a financial-regulatory complex, and it has meant a consolidation of power and privilege. We've created a class of politically protected "too big to fail" institutions, and the current proposals for regulatory reform further cement this notion. Even more worrying, with so many explicit and implicit financial guarantees, we are courting a bigger financial crisis the next time something major goes wrong. We should stop using political favors as a means of managing an economic sector.  Finance and health care are two separate issues, of course, but in both cases we're making the common mistake of digging in durable political protections for special interest groups. We are now injecting politics ever more deeply into the American economy, whether it be in finance or health care. Not only have we failed to learn from our mistakes, but also we're repeating them on an ever-larger scale."  

ALL EYES ON SENATE FINANCE COMMITTEE - The Senate Finance Committee is scheduled to release its health care reform proposal on Wednesday.  This, the last of the five congressional committee bills, is likely to be the most bi-partisan in nature by addressing Republican concerns that include no public insurance option, blocking illegal immigrants from gaining access to subsidized insurance, addressing medical malpractice lawsuits and banning federal subsidies for abortion.  Perhaps the biggest question of all - How millions of uninsureds can be provided with federal tax credits to purchase insurance and the bill remain revenue neutral? - remains to be answered.

GAPS IN OBAMACARE - A report commissioned by The Physicians Foundation, a national health care organization that represents the interests of physicians, raises new questions about the role of socioeconomic determinants as they relate to access, quality, and cost of medical care in the United States. See the the report at www.physiciansfoundation.org.

MORE ON "MADE OFF" - The SEC inspector general reports that securities regulators overlooked numerous warnings about Bernard Madoff's Ponzi scheme, but failed to conduct a proper probe. In fact, there were five separate probes that exposed lies and other questionable actions, but the SEC failed to take action. According to Inspector General David Katz, "Despite numerous credible and detailed complaints, the SEC never properly examined or investigated Madoff's trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme." Do you think someone might be fired?...We doubt it.

MERRILL LYNCH SETTLEMENT - According to the Texas state securities commissioner, Bank of America's Merrill Lynch unit will pay up to $26.5 million in a national settlement resulting from a Texas claim that it allowed unregistered salespeople to sell securities.  The probe was initiated after a Merrill employee said the company saved registration fees by having "client associates" register in only two states, their home state and one additional state. "Client associates" who accept trade orders should be registered in the client's state as well as their home state. What happened to "No harm, no foul?"
 
FUTURE FOR FANNIE AND FREDDIE - The Mortgage Bankers Association (MBA) has proposed that the two formerly government sponsored and now government owned entities be split into three smaller, private companies, called Mortgage Credit-Guarantor Entities (MCGEs). Like Fannie and Freddie, these new entities would enjoy some government backstopping, but would ultimately own the loans underlying the government-guaranteed securities they issue. Should there be a foreclosure, the MCGEs would own the real estate collateral. Specifically the MBA seeks to create a new type of mortgage backed security that works in two parts. In the first part the MCGEs would provide loan-level guarantees. In the second part the government would issue an explicit guarantee based on the credit risk in these securities.

WORLD RECOVERING - The Organization for Economic Cooperation and Development (OECD) said there are increasingly strong indications that the world's economy is on the path to recovery, with both leading developed and leading developing countries emerging from a downturn. The OECD's composite leading indicator of economic activity in its 30 members rose to 97.8 in July from 96.3 in June. The indicators are designed to provide early signals of turning points between the expansion and slowdown of economic activity. FYI, Russia's economy shrank 10.9% in the second quarter, the most on record, after a drop in capital investment contributed to a decline in industrial production and companies struggled to raise funds.

RECESSION OVER - The Reuters/University of Michigan preliminary index of consumer sentiment rose more than expected in September as the pace of job losses slowed and the economy showed signs of pulling out of recession. Former U.S. Federal Reserve Board Chairman Alan Greenspan says that "remarkable growth" in productivity and a depletion of inventories should help the U.S. economy pull out of recession by the end of the year. "A lot of pieces are falling into place for a fairly pronounced recovery not only in the United States, but throughout the world." You know, I sometimes wonder why we even bother to report on what these people think...after all none of these people saw this financial disaster coming.

CREDIT RATE SHRINKS – This from the UK. U.S. credit is shrinking at Great Depression rates, prompting fears of a double-dip recession. Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.


OLDER DUDES HANGING ON -  Pew Research reports that older Americans will make up virtually all of the growth in the U.S. work force in the coming years as a nearly unprecedented number hold onto jobs and younger people decide to stay in school. The survey found the share of Americans ages 55+ who have or were seeking a job rose to 40% this year, the highest level since 1961. In contrast, people 16 to 24 who were active in the labor market decreased to 57%, down from 66% in 2000. You would think the recession is the reason, but respondents also cited a desire to continue work while they were still feeling healthy to be productive, interact with other people or to "give myself something to do."

RELUCTANT RETIREES = LESS OPPORTUNITIES - To the long list of reasons American companies aren't hiring (business losses, tight credit, consumer retrenchment), add the fact that many of their older workers are unable, or afraid, to retire. (See above) In other parts of the developed world, people are retiring as planned, because of relatively flush state and corporate pensions that await them. But here in the United States, financial security in old age rests increasingly on private savings, which have taken a beating in the last year. Prospective retirees are clinging to their jobs.

INVESTORS BEWARE - Regardless of the level of financial regulation, investors need to employ a degree of intelligence and common sense before turning over their money, as evidenced by these four stories reported in a single day (September 8).  First we have an NHL owner who stole millions of dollars from banks and investors to finance his lavish lifestyle, including an interest in an NHL team and large gambling debts.  Then we have the guy in California who paid a jeweler to make him a fake Oscar and pretended to be an Academy Award winner in order to attract wealthy investors to a fraudulent investment scheme.  Over on the east coast, we have a Brooklyn money manager who ran a $40 million Ponzi scheme, telling investors their money would be used for safe investments and then using some of the proceeds to expand his mail order pornography business.  Saving the best for last, we have the Tennessee financial advisor who "spent time making voodoo dolls of his victims to ward off their damaging testimony."  Apparently his voodoo efforts weren't successful...he was sentenced to 12 years in prison for stealing $19 million from some 35,000 victims nationwide.

WEALTH CREATION - Our profession is creating the wealth that drives the world economy one new account at a time.  Few understand what we do. Jack Falvey is doing his best to spread the good word. Please feel free to do the same.  

CAUTIOUSLY OPTIMISTIC - According to a Charles Schwab study, independent advisers are regaining confidence in the economy and directing more investments to equities.

529 PLAN CHANGE - The Treasury Department has recommended a change in how the cap on Section 529 college savings plan contributions is set.  The cap is currently imposed on a per beneficiary per state basis, meaning that accounts can be opened in multiple states and the maximum invested in each account.  Under the proposed change, the cap would be imposed per beneficiary, regardless of how many different plans are opened for that beneficiary.

SEPTEMBER 23 DEADLINE - Word is that rich Americans who have evaded taxes by hiding foreign holdings are rushing to meet the September 23 amnesty deadline.  Those who reveal their holdings by the deadline will face a fine but generally avoid criminal prosecution.  After September 23, "all bets are off" according to IRS Commissioner Doug Shulman.

STEEP DROP - Limra reports that individual life insurance annualized premiums dropped 20% in the second quarter, following a 26% drop in the first quarter.  Variable life sales dropped the most, 55% for the first half of 2009.  On the other hand...

AMERICANS MAINTAINING LIFE INSURANCE – A study by First Command Financial reveals that, while the economy appears to be dragging down life insurance sales, middle-class, Americans are hanging onto their personal policies and preserving important protection in an uncertain financial environment. The August survey reveals that just 4% of Americans report making changes to their personal life.

ON ANNUITIES - In a nutshell, sometimes "Boring Is Better."

CONSUMERS CONTINUE TO PAY DOWN DEBT – Americans reduced their debts again in July. It was the sixth consecutive month that consumers as a group paid down what they owed rather than borrowing more. Since interest is accumulating every month, that is an impressive accomplishment.

FOOD STAMPS UP – The number of Americans receiving food stamps in June, 2009 was 22% higher than in June 2008 and the number receiving food stamps rose by more than 700,000 people compared to May. The average recipient of food stamps in June received more than $133 in assistance. The average household received more than $293. Overall, the USDA distributed more than $4.6 billion in food stamps to 35,122,123 recipients in June.

RETIREMENT WEEK - National Save for Retirement Week will take place October 18-24...the fourth consecutive year that this Congress-endorsed event will raise awareness about the importance of saving for retirement. A recent survey by the Employee Benefits Research Institute shows that more than half of all workers have less than $25,000 saved...a significant problem, as retirees could need between 65% and 85% of their pre-retirement income merely to maintain their standard of living.

SHAME GAME - Faced with a sluggish start to the Obama administration's $75 billion effort to stem foreclosures by reworking loans, Treasury Secretary Timothy Geithner believes that the threat of a public backlash will eventually force more firms to rework troubled loans. "Institutions do not want to live with the consequences of being so far behind the curve of what's possible," Geithner told the Congressional committee overseeing TARP. Beginning in August, Treasury began disclosing monthly the number of modifications completed by servicers through the White House's Home Affordable Modification Program and expects this increased transparency will push lenders to act. Let's just hope that the mortgagees have the where-with-all to continue to make the payments this time. 

FORECLOSURE PREVENTION PLAN PROGRESS – Mortgage servicers have placed 12% of eligible troubled borrowers into trial modifications of the program. In fact, a recently released progress report unveiled by the Department of Treasury indicates that more than 360,000 homeowners at least two months behind in payments received relief through August. This is compared to more than 235,000 individuals (9%) percent of borrowers who were in trial modifications in August.

FIDELITY, SCHWAB IN PRICE WAR - Fidelity plans to waive commissions on new RIA assets and cut tech fees in a move many are calling a pricing war with rival Schwab. Fidelity will eliminate online commissions on equity and option trades for new accounts introduced by registered investment advisers and reimburse account transfer fees that clients pay to leave their former financial services providers.

CREATIVE CREDIT CARD PRICING - The Credit Card Accountability, Responsibility & Disclosure Act of 2009, designed to curb the industry's abusive practices, went into effect a few weeks ago.  However, some say lenders have found ways to get around the regulatory roadblocks.  Under the new law, issuers can't raise rates without 45 days notice, but the rules don't apply to variable-rate cards, with rates that float up and down. Companies are moving more consumers into such cards, whose rates are likely to soar from their record lows. Some banks are also adding annual fees.

MORTGAGE APPLICATIONS AND RATES UP - The Mortgage Bankers Association reports that rates on 30-year fixed-rate mortgages dipped to a three-month low amid the number of mortgage applications having climbed to the highest figure in months.

UNDERSTANDABLE OUTRAGE - Goldman Sachs CEO Lloyd Blankfein said this week that anger over bankers' pay is both "understandable and appropriate." He said that there is little reason for the enormous bonuses paid out after a bank has lost money for the year and admitted that anger over such practices was often justified. Further "multi-year guaranteed employment contracts" should be banned entirely. However, he was quick to point out that with the banking sector seemingly on the road to recovery, too much regulation could quickly hinder growth.  
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