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 November 1, 2008
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DISJOINTED
– Well, if this issue of E-News seems disjointed...that's because
it reflects the global economy! "What ain't nailed down is coming
apart." Consider:
- Treasury warns of 'unprecedented' finance needs
- Groups seek credit card debt forgiveness
- Government near home loan bailout
- Governors call for rescue package for states
- FDIC could back insurance products
- Groups ask Congress to ease pension burden
- And more!
UNPRECEDENTED BORROWING
– The Treasury Department says the department's financing needs
will be substantial as it aims to juggle numerous programs focused on
restoring market stability. "We all benefit from a deep, liquid
Treasury market...(we) have the opportunity to take a leadership role
in devising and implementing private-sector solutions to current
challenges." Either that or put a lot more money printing
presses into action!
MORE GOOD NEWS...CREDIT CARDS
- Credit cards are emerging as the next threat to the banking industry.
As financial companies stop offering the cards to consumers with good
credit, they risk heavy losses from a pullback in business that fueled
big gains over the past decade. The number of defaults is also on the
rise as the financial crisis worsens. This situation has resulted
in an unusual alliance between the Financial Services Roundtable, an
alliance of financial industry interests, and the Consumer Federation
of America, leading to a joint request to federal regulators that
lenders be allowed to reduce by as much as 40% the amount of credit
card debt owed by deeply indebted consumers.
HOME LOAN BAILOUT
- Word is that the government is considering a plan that "would help
around 3 million homeowners avoid foreclosure." The program would
be run by the FDIC and would involve loan modifications. We also
have a report that 7.5 million homeowners are "underwater," meaning
that they owe more on their mortgages than their homes are currently
worth and another 2.1 million people are on the brink of being
"underwater."
STATE RESCUE PACKAGE
- Some state governors are voicing support for a second economic
stimulus package that would include financial assistance to state
governments, enabling them to continue providing essential social
services, such as unemployment benefits and food stamps.
FDIC AND INSURERS
- According to FDIC Chairman Sheila Bair, the FDIC could start
providing guarantees for insurance products if the insurance industry
comes under federal regulation.
PENSION BURDEN
- Estimates are that U.S. companies will need to inject more than $100
billion into their pension funds in order to cover market losses.
This comes at a time when it is difficult for businesses to raise
money. As a result, a coalition of groups is asking Congress for
relief. Specifically, the coalition is asking for legislation
that would roll back Pension Protection Act fair market pension asset
valuation provisions by letting employers "smooth" unexpected pension
plan investment losses over 48 months, instead of the current 24 months.
THE BIG QUESTION
– Does anybody in government know what they are doing? The
answer is obvious...no. Not only is the "Troubled Assets Relief Program
(TARP)" bailout not understood by the people who passed it, but no one
seems to understand what it is supposed to do. The Treasury can't get
the banks to free up money for loans...appears they would rather pay
bonuses and dividends and/or buy other banks.
WE PAY BONUSES AND PARACHUTES TOO
– By "we" I mean taxpayers. Apparently some banks getting funds
through TARP plan on paying out as much as $6 billion in bonuses.
However, NY Attorney General Cuomo warned nine banks due to receive
funds from TARP that bonus payments may be illegal under NY state
law. Then there's the use of taxpayer money for "golden
parachute" payments to departing executives. Congressional
leaders have written to the Treasury Department urging stronger
restrictions on "golden parachute" payments..."Such lavish severance
packages for executives at banks being bailed out could weaken public
support for the program." Gee, you think so?!!
WHO GETS THE MONEY? - Here's an interesting article from BusinessWeek on how regulators are expected to decide which banks receive a capital infusion from the rescue fund.
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FED LOWERS INTEREST RATE - The Federal Reserve lowered the federal funds rate by .5% to 1%. That brings the rate to the lowest level since June 2004.
WORLD CENTRAL BANKS TO FOLLOW SUIT
- Central banks are expected to cut rates as crisis financial
management continues. Brushing off concerns about inflation and in
hopes of containing the global financial crisis, the European Union's
central bank hinted that it could also decrease interest rates. Central
bankers worry that without the rate cuts, panicked investors will flee
stocks that appear to carry even slight risks.
RATE CUT USELESS?
- The Federal Reserve cut its rate .5%, but Wall Street didn't seem to
notice. The effect of rate cuts is less pronounced as regulators
use an increasing arsenal of tools to influence markets. In fact, the
Dow slipped slightly. Apparently, it doesn't matter what the Fed does
with the interest rate, the market won't react as it used to.
SIGN US UP -
The Municipal Securities Rulemaking Board believes efforts to resolve
the ongoing global financial crisis should include the municipal
market. "As you the federal government are doing things, remember the
municipal market. At a minimum, our municipal issuers need to be
provided equal access to any facilities that are provided for the
broader market." Get in line...more to follow.
US TOO – The big bond insurers, Ambac and MBIC, hope to get a part of the rescue plan.
AND MORE IS ON THE WAY
- House Financial Services Committee Chairman Barney Frank says
Democrats will push to pass a second economic-stimulus package after
the Nov. 4 election. Bernanke and Paulson and, we assume, the
administration are agreeing. When are we going to recognize this
country is "stone cold broke."
INSURERS, FED MONEY & MERGERS
- As the Treasury Department considers expanding its rescue plan to
cover insurers, analysts say the move could prompt consolidation in the
industry. Insurers that are supporting the expansion are seen as being
financially healthy and capable of acquiring weaker competitors with
the government aid. Are we taxpayers nuts or what!
RECESSION
– Why is it so hard to say this word? The pure fact is that
the world economy is "in the tank" and could get worse. Efforts by
governments to loosen credit markets may show some signs of working,
but companies are issuing warnings that more bad news may be on the
horizon.
NEW TACTICS FOR RECESSION
– Some experts believe corporate executives will need to think
beyond traditional recession-fighting tactics as they confront the
current financial crisis. "The tactics of recession-as-usual are
neither necessary nor sufficient for firms to weather the global
economic superstorm -- because it's no ordinary squall, but a
once-in-a-lifetime gale ripping up the very foundations of the global
economic order,"
MORE SERIOUS THAN THIS?
- Bernanke and Paulson believe that once trust in the financial system
is restored, investors will return and the economy will begin rolling
again. However, some argue that the global growth based upon
cross-border technological transfer, foreign trade and global finance
can't be sustained and that the financial crisis is a symptom of this
collapse.
GREENSPAN "MAE CULPA"
- Alan Greenspan, former FED chairman, told a congressional committee
that he made "a mistake" in thinking that self-interest would force
banks and other financial institutions to protect shareholders. The
comments are a departure from the free-market thinking that were a
hallmark of his tenure at the Fed. Get this, he went on to say the kind
of heavy regulation that could have prevented the economic crisis would
also have damaged growth in the U.S...what growth? We have lost nearly
40% of the market in the last year.
RATING COMPANY BLAME
– There is plenty of blame to go around for this financial mess
and the rating companies deserve their share. In retrospect it is hard
to see how we could have relied on the ratings provided by the three
major credit-rating agencies – Moody's, S&P and Fitch.
They were and are public companies battling each other for market
share. Looks to me like this is a great place to have an impartial
government regulator.
INDEPENDENT INVESTIGATION COMMITTEE
– Don't count on the House Republicans on the Oversight and
Government Reform Committee to call for an independent committee to
look at the causes of the financial-system meltdown. Too many
Congressional and government fingerprints on causes.
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MARKET JUMPS
- The Dow Jones industrial average surged 11% in one day for the second
highest daily jump in its history. Observers believe the jump was based
mostly on sentiment that stocks had become "too cheap to resist." Maybe
the fundamental values trumped panic and fear, but who knows.
BIG LIFE INSURERS HIT HARD
- Hartford Financial, MetLife and Prudential all reported a brutal
third quarter. As Wall Street has cratered, insurance companies have
seen a significant chunk of their portfolios crumble away and the stock
values of all three have decreased over 50% in the last year.
SIFMA LAY OFFS
- Industry turmoil has caused the Securities Industry and Financial
Association to restructure and lay off a significant number of
employees. According to an email statement released by the association,
"Our members are facing challenges, and those challenges are reflected
across the industry. Tough economic times require hard choices and
today SIFMA was required to restructure. We are sorry to see the
departure of so many of our hardworking and dedicated employees under
these unfortunate circumstances."
SCARY DEAL AT RESERVE FUND
- Between 400,000 and 1 million people have been unable to make
withdrawals from the Reserve Fund, the country's oldest money-market
fund. Problems started a month ago and have quietly persisted, even as
the federal government moved to shore up confidence in money funds. The
fund did start making some distributions on Friday.
LOOK FORWARD?
- Economists trying to predict the bottom of the stock market slide are
turning to more forward-looking measures. Instead of relying on gross
domestic product and monthly payroll figures, which give snapshots of
what has happened, economists are looking at indicators such as
home-vacancy rates and foreign stock markets. Hey, try "tea leaves"...
couldn't be as bad as past forecasts!
HELP WANTED
– Apparently the Treasury Department is struggling to hire asset
managers, delaying the implementation of the $700 billion rescue plan.
A lack of personnel at the department, as well as concern over fees
that will be paid to the managers, has led to the delays. And you
thought the Iraqi War was ill planned.
2009 SOCIAL SECURITY
- The taxable Social Security wage base is increasing to $106,800 next
year, an increase of $4,800. The 2009 Social Security
cost-of-living increase will be 5.8%. The latter points out a
trend of some concern. According to a Fidelity Investments
survey, nearly half of 61-year-old Americans are planning to start
taking their Social Security payments at age 62. We wonder how
many of those folks understand that not only will they then receive
reduced lifetime benefits, but that the annual cost-of-living increases
will also apply only to those reduced benefits.
HEDGE FUND REGULATION
– Well, here is a great example of delayed reaction. MarketWatch
says that the time for regulating hedge funds has come. "The $2
trillion hedge fund industry has become so big, so much a part of the
financial apparatus, that it must be regulated now. The funds are too
leveraged, too intertwined, and the markets they play in are so
dangerous that it's a wonder that we haven't felt the full brunt of a
hedge fund chain-reaction so far."
LAWYER BOOM -
Defense lawyers are reaping the benefits of an unprecedented number of
criminal probes into the collapse of several high-profile
financial-sector firms. "People are rushing to get the best lawyers
before they can be hired by someone else," said Harvard Law School
professor Alan Dershowitz. Got to love him and the profession.
SMALL BANK FEARS
– The Independent Community Bankers of America, an association
representing small banks, is concerned that the Treasury's bank-rescue
plan will help large financial institutions gobble up smaller rivals.
"It will be a battle royal from day one in Congress. The one part of
this system that has functioned well has been the community banking
system. We're going to be screaming every step of the way."
WALL STREET LAY OFFS
- Wall Street has already laid off 110,000 people in 2008 as a result
of the financial crisis, and some experts see that number reaching
200,000 by the end of the year. This is certain to "trickle down" to
Manhattan's small service business...restaurants to bars to
cleaners...and all their employees.
AIG MAY NEED MORE
– No, I'm not kidding. AIG CEO Edward Liddy says the insurer may
need more money than the $122.8 billion emergency loan it has already
received. "To the extent they [capital markets] continue to go down and
we have to keep posting collateral...it's possible it may not be
enough."
CREDIT UNION SURGE
– As banks struggle, credit unions are seeing a surge in
business. By sticking to "boring" banking practices, the nonprofit,
members-only credit unions are scooping up market share. As one expert
sees it, "In good times, you'd say these guys are much too
conservative, but in times like these, it's just what the doctor
ordered."
ING GETS $13 BILLION
- The Dutch government is acquiring $13 billion in non-voting stock in
ING. The transaction is structured to not dilute other shareholders
value. ING's executives will not receive bonuses for 2008 and no
dividend will be paid for the final quarter of the year. The
Netherlands is also putting the equivalent of about $3.8 billion in
cash into AEGON
EFFECTIVE REGULATION – We sure hope this is not an oxymoron because it is exactly what we need. The WSJ
points out that over the past couple of years, policymakers were
suggesting that the financial industry may have been subjected to too
much regulation. What is needed now is "to view competent regulation as
a competitive advantage, not an albatross."
BUFFETT BUYING
- Warren Buffett is buying American...stocks, that is. "A simple rule
dictates my buying: Be fearful when others are greedy, and be greedy
when others are fearful."
SAVINGS UP, BRIGHT SIDE?
– With credit more difficult to obtain, the financial crisis is
making Americans cut spending and save more money. After years of
practically no savings, you would think that would be a good thing.
However, experts warn that it may slow a recovery, as increased saving
means decreased spending.
GLOBAL WARMING – Funny headlines below. What if we are incorrect and the earth is getting colder? Should we pollute more to warm it up?
- First October snow since 1922 blankets London as global warming bill debated...
- Switzerland sees most snow for October since records began...
- Florida breaks 150 year record...
COLLEGE COSTS CLIMB
- The average total cost of attending a private four-year college,
including room and board, climbed to $34,132 for the 2008-09 academic
year. The comparable figure for public schools is $14,333, with
out-of-state students paying $25,200. Here's some additional
information from CNNMoney.com.
BUT LTC COSTS DON'T
- According to the MetLife Mature Market Institute, long-term care
costs have flattened out or increased only modestly this year.
Click here for a copy of the 2008 MetLife Market Survey of Nursing Home and Assisted Living Costs.
HOW SAFE ARE ANNUITIES – We all sure hope they are! See what the WSJ says. Here is a thumbnail in case of insolvency:
- Both fixed and variable annuities are protected by state guaranty funds
- Death benefits are often protected up to $300,000.
- Cash values are often protected to a maximum of $100,000.
- With a variable annuity, some insurer guarantees are protected, but losses due to market declines generally are not.
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