FSO E-NEWS WEEKLY

December 15, 2009 Edition

FINANCIAL REFORM QUESTIONS - The House has approved a sweeping overhaul of financial regulation but, weighing in at a now modest 1,300 pages, questions still abound. Here is a very brief summary:

Large financial companies including Goldman, Chase and others would be hit with billions of dollars in fees and see new restrictions.
The bill would strip the Fed of nearly all powers to write consumer-protection laws and would allow Congress to audit the Fed's monetary policy decisions.
The bill gives shareholders an advisory vote on executive compensation and creates a new Consumer Financial Protection Agency. The new federal agency would write rules and examine banks for compliance with consumer protection.
It gives the government the power to break up healthy financial companies if regulators believe they pose a threat to the financial system.
It will also direct the Federal Deposit Insurance Corp. to collect $150 billion in fees from big financial institutions to create a fund to pay for future large failures.
Hours before passage, the House killed an amendment that would have given the FINRA the authority to regulate investment advisers at broker-dealers.

Time on your hands? Read it all at Full Text of the Legislation. Alternatively, here's a shorter summary from Reuters.

OBAMA TO THE BANKERS - At a meeting with Wall Street bankers on Monday, President Obama urged them to help rebuild our economy..."America's banks received extraordinary assistance from American taxpayers to rebuild their industry. Now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy."

EXEMPT FROM TARP RESTRICTION - Treasury Secretary Timothy Geithner believes that small businesses should be exempt from restrictions attached to the Troubled Asset Relief Program. He believes smaller lenders are concerned about the stigma of requesting TARP funds. "They think it's a sign of weakness, not strength. Even though capital is the best way to help get lending going again, they're reluctant ... To be effective in dealing with this, we have to mitigate the stigma." Not sure how this exemption would reduce the stigma unless he plans to make the loans anonymous.

TARP SAVED WORLD - The Congressional Oversight Panel concluded in a year-end report on TARP that the plan "can be credited with stopping an economic panic." However, the group criticized the Treasury's management of the program and cited certain flaws in the effort. "Even so, there is broad consensus that the TARP was an important part of a broader government strategy that stabilized the U.S. financial system by renewing the flow of credit and averting a more acute crisis." FYI, $200 billion still hasn't been paid out.

WELL, MAYBE THE WORLD STILL ISN'T SAVED – Secretary Geithner has decided TARP will continue until October 2010. Geithner said, "It is imperative that we maintain this capacity to respond if financial conditions worsen and threaten our economy." However, the Obama administration plans to use unspent TARP money for other initiatives, including job creation, credit for small businesses and more help for homeowners facing foreclosure.

TARP REPAYMENTS - Bank of America has repaid the $45 billion it received from TARP. In addition, Wells Fargo announced that it will repay the $25 billion it received through TARP and Citigroup plans to repay $20 billion in bailout money. The government still has a $25 billion investment in Citigroup in the form of common stock (a 34% stake in the company). With these repayments, Treasury Secretary Geithner said the government's emergency investment in financial institutions will be reduced by more than 75%. Plus, "we the people" are due to receive a "healthy profit."

"CRAM-DOWN" AGAIN - Industry groups are opposed to an amendment to the overhaul of financial regulation that would give judges the authority to alter mortgage terms. Rep. Barney Frank, chairman of the House Financial Services Committee, said the "cram-down" measure will be added to the broader bill. "These provisions will harm the housing market, increase bankruptcy filings and abuse of the bankruptcy system, and increase the cost and availability of credit for new homebuyers and those that want to refinance their mortgages." Hey, does anyone understand that encouraging bad loans is what got us into our current financial mess to begin with?

FINAL NAIL? - The Centers of Medicare and Medicaid Services (CMMS) issued their report on the House version of health care legislation. According to reports at Heritage.org, here are some highlights (or lowlights):

Health care costs would rise by $234 billion;
17 million Americans would be forced out of their existing health insurance;
19 million Americans would pay $29 billion in taxes/fines and receive no health care in return;
33% of all Medicare Advantage customers would lose their health care plan;
18 million Americans would be put on welfare;
The $493 billion in Medicare cuts would force 20% of Medicare providers to become unprofitable, thus jeopardizing access to care for all seniors; and
The explosion in Medicaid recipients would exacerbate existing health care access problems for the poor.

The latest CNN poll showed 61% of Americans now oppose the legislation, compared to just 36% who support it.

WORST FY SINCE 1945 - According to data from the Treasury and the White House Office of Management and Budget (OBM), the government's $1.42 trillion deficit in fiscal year 2009 was the worst year on record since World War II. Tax receipts for the year fell 16.6% overall, while spending was up 18.2% compared to fiscal year 2008. The causes: rising unemployment, the economic slowdown and the extraordinary "measures taken by lawmakers to stem the economic meltdown." Consequently, the annual deficit rose 212% to the record dollar amount of $1.42 trillion, from $455 billion a year earlier. As a share of the economy, the deficit accounted for 10% of gross domestic product, up from 3.2% in 2008. However, the 1945 deficit hit 21% of GDP.

TWO TRILLION MORE - Democrats plan to increase government's debt limit by nearly $2 trillion as part of a bill to pay for wars in Afghanistan and Iraq. The amount equals the total of a year-end spending spree by lawmakers and is big enough to ensure that Congress doesn't have to vote again on going further into debt until after the 2010 elections. The debt limit will be nearly $14 trillion...that is "only" about nine times all the income taxes collected in 2007. Here's some insight on why the federal deficit will raise taxes.

ADMINISTRATION SAYS RECESSION OVER – On Sunday morning, the President's top economic advisor, Larry Summers, said "everybody agrees that the recession is over," but he did not say when the unemployment rate could be expected to improve.

ADMINISTRATION SAYS RECESSION NOT OVER – On Sunday afternoon, White House economic adviser Christina Romer, when asked if the recession is over responded, "Of course not. For the people on Main Street and throughout this country, they are still suffering, the unemployment rate is still 10 percent." Wow, what a difference 12 hours can make!

"CAP AND CHARADE" – Barron's reports EPA head Lisa Jackson is way off base if she believes that the White House will allow the Environmental Protection Agency to follow through with actual regulation...knowing that this would kill a hoped-for $650-billion golden federal-revenue goose called cap and trade. The EPA has no taxing authority. The revenue stream would vanish if Jackson actually follows through.

"CAPPED" – The same article in Barron's warns about energy based investments because "some prospects that look good today may be 'capped' (to borrow a Mafia and Tonya Harding term) tomorrow by overly cautious lenders." To see how this scenario could unfold, see the article at http://online.barrons.com.

TROUBLED STATES - According to a Pew Center on the States' analysis, the 10 most troubled states in the U.S. are Arizona, California, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin, with Colorado, Georgia, Kentucky, New York and Hawaii not far behind in the fiscal problems they're facing. Click here for more information.

AMERICANS PESSIMISTIC AND DISTRUSTFUL - A CNBC "Wealth in America Report" finds Americans remain pessimistic about the economy and have little trust in Washington's economic leadership. The approval rating for President Obama's economic leadership was highest at just 46%, the Democratic Party at 39%, the Republican Party at 26%, Federal Reserve Chairman Ben Bernanke at 22% and Treasury Secretary Timothy Geithner at 18%. Nearly one in four Americans disapproves of the way both political parties are handling the economy. Asked about their confidence in American institutions and industries, just 24% expressed confidence in the Federal Reserve, 19% in the Treasury, 17% in healthcare companies and 10% in the financial industry. By contrast, 77% of respondents said they are confident in the American military. The "Wealth in America" survey claims a margin of error is 3.5% but was based on just 808 adults. Click here to see the full results.

SEC DELAYS RULE 151A - In response to a petition filed by Old Mutual, the SEC said it will delay the effective date of proposed Rule 151A by two years. The rule, which would cause indexed annuities to be considered securities, would have gone into effect for products sold on or after January 12, 2011. The National Association for Fixed Annuities is warning supporters against using the delay of enforcement of Rule 151A as a reason to relax. The decision is a positive development, but "NAFA is disappointed that the SEC also indicated that it still may proceed with adoption of this rule."

TAX UNCERTAINTY - Without Senate action, the estate tax will disappear in 2010 and a host of popular tax breaks will expire. The House has passed a permanent extension of current estate tax law, as well as legislation to extend for one year $31 billion in popular tax breaks that expire at the end of 2009. On the estate tax front, the Senate is interested in indexing the estate tax exemption, making it portable between spouses and reintegrating the estate and gift taxes, so it's most likely we'll see 2009 estate tax rules continued on a temporary basis for 2010 only, to be followed by permanent reform. In regard to the expiring tax breaks, the House bill pays for them with a tax increase on investment fund managers, which has been rejected by the Senate in the past.

CASH FOR CAULKERS - President Obama has proposed a new program that would reimburse homeowners for energy-efficient appliances and insulation, part of a broader plan to stimulate the economy. The administration didn't provide immediate details, but said it would work with Congress on crafting legislation. Steve Nadel, director at the American Council for an Energy-Efficient Economy, who's helping write the bill, said a homeowner could receive up to $12,000 in rebates. Here's more information from CNNMoney on how the program might work.

CI AND DI – Some experts believe that critical illness insurance (CI) needs to be considered an integral part of any disability insurance (DI) plan. Consider:

Clients are more likely to survive a serious illness or injury today than ever before, but many of the costs of survival are not covered by their health insurance.
Costs can reach thousands before DI "kicks in."
DI is designed to replace the income loss and not the additional expenses created by a critical illness.
CI may be more cost effective than a rated DI policy.
CI is available for clients DI will not cover. Homemakers, part-timers, those with "multiple income streams," etc.

Check out this VSA Critical Illness Risks presentation and then get prices and proposals from your company or broker.

CLUELESS - According to a new survey from the LIFE Foundation, many Americans are clueless about paying for long-term care services, thinking they can rely on Social Security, Medicare and their regular health insurance to cover long-term care bills. Learn more about the survey at www.lifehappens.org.

IRS WEALTH UNIT - The IRS has hired hundreds of employees to staff a new unit set up to uncover rich tax cheats who hide their wealth in complex business entities. The IRS high wealth unit is part of a broader effort to combat international tax evasion. The new unit is focusing on trusts, real estate investments, privately held companies and other business entities controlled by wealthy individuals. Tax authorities in other countries have established similar units and there may be coordination between countries to scrutinize corporate tax filings.

VARIABLE LIFE AND ANNUITY COMMUNICATIONS - FINRA has released a draft of an update to the rules that govern FINRA members' communications with the public about variable life and annuity products. More information is available from the National Underwriter.

401K "MATCHING" UP - The Profit Sharing/401(k) Council of America reports that for companies that had stopped matching contributions to their 401(k) plan, 46.7% have either reinstated the match or plan to do so in the first quarter of 2010. Overall, 76.8% of companies match their employees' contributions.

VARIABLE ASSETS UP – The Insured Retirement Institute reports that the net assets of the variable annuity industry posted an increase for the first time in five quarters, up 1.2% from the same period in 2008.

NET WORTH UP – American's net worth rose 5% last quarter, to $53.4 trillion, the second straight quarterly increase. However, it is still below the peak of $64.5 trillion reached before the recession began.

INCOME AND VAT TAXES? - An increasing number of influential Democrats and fiscal-policy experts have signaled that lawmakers will have to get a handle on the deficit. And they recommend seriously considering the creation of a value-added tax (VAT) on top of the federal income tax. Paul Volcker, the former chairman of the Federal Reserve who heads President Obama's tax reform panel, says "I think if we can't do it on the cost side, we've got to go on the revenue side. And it's too early to do it, but it's not too early to begin wondering. You've got talk about some tax that hits consumption. Value-added is one." John Podesta, the head of the liberal think tank Center for American Progress who headed President Obama's transition team, also raised the issue of a VAT.

RIP WALL STREET BONUSES – Well, bonuses may not be dead; however, you can expect salaries will be more important and year-end awards will be contingent on how risks pan out. Goldman Sachs, the profit king of the securities business, announced its 30 top executives will get their traditional year-end bonuses in stock instead of cash. The stock will vest in three years, but recipients won't be able to sell the stock for five years. Further, the stock can be rescinded if Goldman later determines that the executives earned it by taking heedless risks...of course, this risk is already built into the stock value. Shareholders will also be allowed to vote on the company's pay, though their yes or no won't be binding on management.

NEXT HOT JOBS? - According to Investment News, the financial crisis has created the next growth industry...helping financial firms figure out how to follow the rules. A Labor Department report predicts that financial examiners and compliance officers are expected to be among the nation's 30 fastest-growing occupations over the next 10 years (compliance work has already paid off for 13 current and former FINRA executives who made more than $1M apiece in 2008, a year in which the regulatory organization lost $696.3M). Other hot job predictions include accountants, auditors, nurses, home health aides, physician assistants and, because we do love our pets, veterinarians and vet techs.

"SEE THE PEOPLE" – You gotta love this guy. When it comes to "cold calling," New York Life agent Eric S. Klarman has brought new meaning to the words. Cold weather or not, you can find him at NYC subway stations, sitting at a table with a New York Life banner, meeting and greeting prospective clients. "An agent has to have a lot of discipline to make a tremendous amount of phone calls, and I learned early on in my career that I didn't have that discipline."

YOU CAN GO HOME AGAIN – If your parents let you! The Census Bureau reports that one in eight Americans between the ages of 25 and 34 are currently living with their parents...about 5 million young adults. Some haven't moved out of the house for the first time, while others are "boomerangers" who have moved back in until they can get back on their feet. Advice, make the kids pay their share or they may never leave!

WHOLE BODY DONATION – Basic funeral costs are now at $6,200 and some people are opting for a cheaper way out...whole-body donation. There is another equally important reason...helping to improve medical care. There's a never-ending need for cadavers for education and research and you can find more information at http://www.anatomicgift.com.