Hill's Personal Finance

Some Financial New Year's Resolutions

Things you might want to consider doing in 2010.

 

Okay. It’s that time of year - the time for New Year’s resolutions. They can include financial resolutions. Here are some possibilities for 2010.

Control non-mortgage debt. Experian says the average American carries about $17,000 in debt unrelated to home loans. Too much of this is simply credit card debt. So how about paying down, paying off and maybe getting rid of some cards?¹

How much financial ground can you lose to plastic? Well, if you have a credit card with a $17,000 balance and 10% APR and you pay $200 monthly on it, it will take you 12 years to pay it off.¹

You may have so-called “good debts” as a consequence of your business or your professional career. Yet ultimately, debt is debt. You can certainly plan to build wealth and control debt at the same time, and why not plan to do both?

Play catch-up if you’re older than 50. All of us over 50 have the chance to make a catch-up contribution to our IRAs and 401(k)s. If you have a 401(k), you can defer up to $22,000 of your 2010 salary into it if you’re over 50 (an extra $5,500 above the usual limit). You also have the chance to contribute an extra $1,000 to your IRA (or among multiple IRAs if you have more than one). And if you’ve got an IRA, there’s no point in waiting until April 15, 2011 to make your 2010 contribution – if you wait that long, you’ll potentially lose 15 months of interest.²

Look into the possibility of a Roth IRA conversion. 2010 presents investors with a prime opportunity to convert traditional IRAs into Roths. The IRS has removed the income limitations on Roth conversions this year, and it will let you spread the taxes due on a 2010 Roth conversion across 2011 and 2012. However, you should definitely talk to a tax professional before you make this move. As income tax rates could be raised for 2011 or 2012, you may want to take the tax hit on a Roth conversion in 2010 instead.³

Keep important documents where you can access them. Tax returns, wills, trust documents, deeds, insurance policies – you don’t want to have to hunt for this stuff, and neither should your heirs in a crisis. You may not want to keep these documents out in the open, but you should know where they are. Resolve to put them all together in a central place in 2010. Another option: you may want to store copies online. Some financial advisors offer their clients firewall- away from home if needed.

Understand how your portfolio assets are allocated. A new FINRA survey finds that 79% of Americans regularly contribute to retirement savings plans. That’s the good news. The bad news? About a fifth of those people had no idea how those assets were invested.⁴

When stocks do well, it is easy to become less vigilant about your investments. It is also easy for your portfolio to get out of whack and become overweighted in this or that asset class. So the first part of 2010 is a very good time to check in with your financial advisor. After all the volatility in the market the last couple of years, it is prudent to review your investments and see if your portfolio needs rebalancing to bring it back in line with your risk tolerance and investment horizon.

More people abide by financial resolutions than you might think. In late 2009, Fidelity surveyed a group of about 1,000 Americans and found that 60% of them had kept financial resolutions they made at the start of the year.⁵ So it can be done. Resolve to change your financial habits for the better – and follow through on it.

 

Citations.

¹ walletpop.com/blog/2009/12/28/put-the-solution-in-resolution-10-steps-to-financial-sanity-i/ [12/28/09]

² washingtonpost.com/wp-dyn/content/article/2009/12/18/AR2009121804699.html [12/18/09]

³ latimes.com/business/la-fi-roth-iras1-2010jan01,0,3862158,full.column [1/1/10]

⁴ foxbusiness.com/story/markets/americans-nearly-flunk-financial-literacy-test/ [12/28/09]

⁵ blogs.consumerreports.org/money/2009/12/financial-2010-new-years-resolutions-surveys-save-money-spend-less-stick-to-budget-fidelity-investme.html [12/31/09]

Safety Tips for Online Shopping

How to avoid getting ripped off.

 

Whether you shop online routinely or infrequently, it will help to follow some precautions this holiday season as you hunt for bargains. The risk of identity theft rises as you offer more and more information about yourself online, so the holiday season is a time to be careful as well as resourceful. Here are some dos and don’ts.

Don’t use a debit card, and use only one credit card. If you use but one credit card for all your online shopping, you’ll just have to cancel one card if your card number is stolen and have just a single credit card firm to deal with. It would be wise to keep a low credit limit on that particular card. If your debit card gets hacked, the thieves can go straight to your bank account and drain it. You know that $50 limited liability common to credit cards? You have to report identity theft within two days to get that $50 limited liability with a debit card.¹

 

Some credit card firms give you a really nice option – the choice of creating a unique, protected online transaction number for each purchase you make over the Web. So in other words, the retailer you’re buying from doesn’t actually see your credit card number – just this unique purchase number. In this case, should your credit card information be stolen, you don’t have to cancel your card, and the credit card issuer has records of specific transactions that may help catch the bad guy.²

Do look for the "https://" when you enter personal information. When you see that, it means you are transmitting data within a secure site. (You’ll see a padlock symbol at the bottom of the browser window.) Look for the VeriSign or CyberTrust mark of security.

Do watch what you click – and watch out for fake sites. Pop-ups, attachments from mysterious sources, dubious links – don’t be tempted to explore where they lead. Hackers have created all manner of “phishing” sites and online surveys – seemingly legitimate, but set up to siphon your information. It is better to be skeptical than to visit a fake PayPal site or to download spyware that is allegedly Norton Utilities or Panda AntiVirus. If anything seems weird, Google or Bing or Yahoo the merchant name and see what comes up.

Do protect your PC. When did you install the security and firewall programs on your computer? Have you updated them recently? Think about buying the latest and greatest from a credible retailer before you shop online this season as a present to yourself. 

Don’t shop on the job – or if you do, do it after five. If you tell your boss “But I only have dial-up at home,” how sympathetic is he or she really going to be? (Of course, if you own a business or work for yourself, no one’s stopping you.) If for some weird reason you just can’t shop from your PC or Mac at home, at least make it quick - bookmark the sites you need to visit at lunch and go there after 5:00pm or during your lunch hour the next day.
 

Do update stored passwords – and make them really obscure. If you visit a site a lot, it is a good idea to change your password once in a while. Mix letters/words and numbers.

 

Don’t shop using wi-fi. You are really leaving yourself open to identity theft when you use a public wi-fi connection. Put away the laptop and wait until you leave that coffee emporium or airport terminal. Yes, hackers can tap into your Blackberry, iPhone or Smartphone via the same tactics by which they can invade your PC.

 

 

Citations.

¹ tallahassee.com/article/20091127/BUSINESS/911270320/1003 [11/27/09]

² dailyfinance.com/2009/11/25/a-flurry-of-scams-accompany-black-friday-shopping/ [11/25/09]

Should Something Replace the 401(K)?

Do Americans need a new way to save for retirement?

 

In fall 2009, TIME Magazine raised eyebrows with a cover article called “Why It’s Time to Retire the 401(k)”. Author Stephen Gandel, the magazine’s senior economic writer, argued that 401(k)s, 403(b)s and IRAs had proven themselves “a lousy idea, a financial flop.”

Citing data from the Society of Professional Asset-Managers and Record Keepers, Gandel noted that in 2009, the average 401(k) had a balance of $45,519. Moreover, 46% of all 401(k) accounts had balances of under $10,000. However, he failed to mention that the average 401(k) account has been held for less than a decade.^1,2

A 401(k) plan simply takes too long to succeed, Gandel argued, and is too susceptible to market forces; in a market downturn, he said, it is unfair that the most hurt are the most invested.

What might the alternative be? A New York Times editorial called for a radical move, contending that “the only way to avoid wide variations in [401(k)] outcomes would be to develop a savings plan in which the government shared the risk - say, by providing a guarantee that returns would not fall below a certain level.” The editorial called for shifting the retirement savings “risk that is currently borne by individuals onto corporations and the government.”³

Obviously, not everyone is going to agree with that. But arguments for something similar are gaining momentum. A group of retirement plan administrators calling themselves the ERISA Industry Committee is pitching an idea called the New Benefit Platform for Life Security, which sounds like kind of a super-IRA with some characteristics of an annuity.

In this concept, your employer would have nothing to do with your retirement plan (unless it wanted to match your contribution to it as a perk). Instead, you would set up your own portable retirement plan with a retirement plan administrator of your choice in the free market. Your “NBP” wouldn’t have contribution limits, and you could set it up like a traditional pension to produce a lifelong retirement stream upon retirement. It certainly sounds great – except for one drawback. Who knows if the company acting as your retirement plan administrator would be around 20, 30 or 50 years from now?⁴

Other voices are proposing retirement insurance, possibly even from the federal government. Prof. Teresa Ghilarducci, an economist at The New School in New York City, has offered the idea of directing 5% of the wages of all working Americans into a mass retirement fund, which would pay out 26% of your end salary annually for the remainder of your life. (A little social security to complement Social Security, so to speak.) A Harvard professor would like to set up Social Security so that we would get 20% more than our final pay in SSI.¹ At this juncture and with this federal deficit, who knows if these are anything other than pipe dreams.

The 401(k) is still a vital retirement savings vehicle. In fact, many financial advisors feel it is the most useful retirement savings vehicle available to most Americans. The problem is that many 401(k), 403(b)s and IRAs are underutilized – people invest too little, or too infrequently, or withdraw what they’ve saved and invested too often.

Reaction to market whiplash, or a prelude to real revision? Of course, had the stock market not suffered so badly in late 2008 and early 2009, people might not be talking about this at all. Whether history proves the 401(k) a great idea or not, the thing for pre-retirees (and journalists) to remember is that there is no one retirement savings or retirement planning “answer”. A 401(k) is simply one of the “clubs in the bag” that you can carry as you stay “on course” for retirement – ideally, a component of a diversified retirement savings strategy.

 

Citations.

¹ time.com/time/business/article/0,8599,1929119-1,00.html [10/9/09]

² investmentnews.com/apps/pbcs.dll/article?AID=/20091025/REG/310259979/1031/RETIREMENT [10/25/09]

³ nytimes.com/2009/08/24/opinion/24mon1.html?_r=1 [8/24/09]

⁴ moneywatch.bnet.com/retirement-planning/blog/financial-independence/retire-the-401k-replace-it-with-this/558/ [10/15/09]

 

Corporate Profits Improve

Summer brings fresh optimism to Wall Street.

Corporations are making money again. Earnings reports amount to some of the most powerful indicators on Wall Street, so it has been great to see some of the headlines in the news this month. On August 6, with 80% of S&P 500 firms having shared 2Q 2009 earnings, CNBC.com rounded up data and found that 74% of S&P 500 companies had beaten estimates - a seismic shift from the first quarter.¹

While some of these profits reflected corporate decisions to downsize into smaller, leaner firms, others were attributable to the power of the global economy. After all, corporations such as Microsoft, Caterpillar, Intel and IBM now earn most of their revenue overseas, with surging/emerging economies in Asia often playing a big role in their profitability.²

AIG feels confident it can repay the government. Shares of the insurance titan shot up 21% on August 20. Its newly appointed CEO, ex-Met Life CEO Robert Benmosche, told Bloomberg News that “we believe we will be able to pay back the government and we hope we will be able to do something for our shareholders as well.” Edward Liddy, AIG’s former CEO, again stated this month that it could probably pay the entirety of the federal bailout funds back within 3-5 years.³

AIG made money in the second quarter - $1.8 billion, in fact. It still owes the federal government more than $80 billion – but that’s much less than the $182 billion in debt it once faced.³

New optimism for Citigroup, other big banks. Although banks are still comparatively hesitant to lend, earnings certainly improved for some big names – Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America combined for $13.6 billion in profit, just two quarters after they posted $20.8 billion in collective losses. Citi’s shares went up almost 9% on August 20 – capping a climb of about 56% during the last month – on growing faith that Citi will sell some of its troubled assets and pay back the federal government in reasonable time. Analysts liked the news that the Swiss government intended to reduce its stake in UBS, musing that the U.S.government might in turn wish to reduce its stake in Citi. Shares of State Street Corp. and SunTrust Banks Inc. also respectively rose 5.4% and 4.1% on August 20.^4,5

Speaking of UBS, its analysts recently concluded that the U.S. Treasury is up nearly $10 billion since it converted $25 billion worth of preferred Citi shares in March. They converted at $3.25 per share; as of August 21, they were trading at about $4.70 a share, about 48% north of the March level. It appears risk has brought reward.⁶

 

Ford Motor Co. made money – and GM & Ford are boosting production. The C.A.R.S. program certainly was a tonic for domestic auto sales. In mid-August, Ford said it would make 10,000 more cars and trucks in 3Q 2009, and 141,000 more in 4Q 2009. General Motors said it would ramp up car/truck production by 60,000 vehicles in the second half of 2009, putting 1,350 employees back on the job and providing almost 10,000 workers with overtime. Ford made $2.3 billion in 2Q 2009 profit and was in the black by $834 million for the year’s first two quarters – largely through accounting gains, but still notable.^7,8

Can we see a strong September? As many longtime market watchers know, September is historically the weakest month for stocks. On average, the S&P 500 has lost 1.3% in September and the DJIA 1.2%. Trading volume has been light through the summer rally.⁹ It will be interesting to see if the current Wall Street optimism will translate into a September of strong gains.

Citations.

¹ cnbc.com/id/32313829 [8/6/09]

² online.wsj.com/article/SB20001424052970203517304574306414148814226.html [8/10/09]

³ money.cnn.com/2009/08/20/news/companies/aig/?postversion=2009082014 [8/20/09]

⁴ reuters.com/article/innovationNews/idUSTRE57J4RP20090820 [8/20/09]

⁵ washingtonpost.com/wp-dyn/content/article/2009/07/17/AR2009071700885.html [8/20/09]

⁶ blogs.wsj.com/marketbeat/2009/08/21/citigroup-shares-treasury-is-up-almost-10-billion-since-conversion/ [8/21/09]

⁷ usatoday.com/money/autos/2009-08-19-automakers-production-gm-ford_N.htm [8/19/09]

⁸ freep.com/article/20090820/BUSINESS01/908200439/1320/Ford-Motor-presses-for-UAW-modifications [8/20/09]

⁹ cnbc.com/id/32506534 [8/21/09]

CLEARING UP THE HEALTH CARE DEBATE

Who would fund the reforms? Would there really be a “death list”?

Sorting out the possibilities, facts and misconceptions.

 

The town hall debates over health care reform have ignited Americans like few recent issues. Discourses have become shouting matches. Away from the noise, here is a roundup of where things currently stand.

Who would pay for all this? Over the next 10 years, the federal government will need (by President Obama’s estimation) $950 billion to fund its health care programs. As planned, roughly a third of the money will be raised through increased revenues (i.e., limiting tax deductions for the wealthiest Americans) and two-thirds of it is supposed to come from reallocations of taxpayer money the federal government is already scheduled to receive.¹ A coalition of pharmaceutical industry CEOs met with the President in July and have since pledged $80 billion in cost savings over the coming decade to help pay for the reform.²

 

Would Medicare be cut? Republicans and Democrats disagree. “Nobody is talking about trying to change Medicare benefits,” President Obama stated during a July AARP teleconference. “What we want to do is to eliminate some of the waste that is being paid for out of the Medicare trust fund.” The non-partisan Congressional Budget Office figures that the House of Representatives version of the bill would trim Medicare spending by $500 billion across the next decade with no impact on Medicare benefits. AARP claims that “none of the health care reform proposals being considered by Congress would cut Medicare benefits or increase your out-of-pocket costs for Medicare services.” However, in an August 15 Republican Party radio address, Sen. Orrin Hatch contended that “hundreds of billions of dollars” will be cut from Medicare and used to “expand a financially-strapped Medicaid program and create another government-run plan.”^3,4

 

Would this run up the deficit further? The Congressional Budget Office says yes. It forecasts that President Obama’s reforms would add $239 billion to the federal deficit. Few on Capitol Hill think the reform effort could pay for itself.⁵  

 

Would health care be rationed? That’s what ex-Alaska Governor Sarah Palin contended in a Facebook post. The potential Republican presidential candidate stated that the reforms would lead to a system that would “refuse to allocate medical resources to the elderly, the infirm, and the disabled who have less economic potential.” Democrats and other supporters of the reforms counter her claim by saying that the current health care system already features “rationed” care dictated by health insurance company bureaucrats.⁶

 

Would there really be “death panels”? Earlier this month, Palin contended that the President’s health care reform proposals included “death panels” that would decide if seriously ill patients would live or die. In the eyes of many legislators, Palin was wildly misinterpreting a provision in the health care reform bill that would allow doctors to offer voluntary consultations about living wills, hospice care, health care directives and pain medication to patients and loved ones facing end-of-life decisions. (If the reforms pass, Medicare would pay physicians to provide this consulting.) The Senate Finance Committee has dropped this idea from its version of the proposed legislation; it remains in the House version.⁷

 

Would the government (and taxpayer dollars) pay for abortions? It is uncertain. In one variant of the health care reform bill, abortions would have to be available via at least one insurance plan; however, Democrats say any abortions would be paid through patient premiums.⁵

 

Would undocumented immigrants get free health care? On the CBS Evening News, Sen. Ben Cardin (D-MD) was heard stating, “Illegal aliens will not be in this bill, period, the end.” As currently written, the legislation states that only those lawfully present in the

United States

can qualify for health coverage. Yet what if one family member is in

America

legally, but others aren’t? Could his or her relatives become eligible? Republicans say that the proposed legislation offers no way to effectively stop undocumented immigrants from applying for health care benefits.⁵

 

The debate rages on. Politically, the health care reform effort seems poised to end up being the story of the year – and the contention and negotiation will certainly last into fall. Stay tuned.

 

Citations.

¹ baltimoresun.com/health/health-care/bal-health care-faq,0,5260471.story [8/14/09]

² baltimoresun.com/business/bal-bz.pharma14aug14,0,5384283.story [8/14/09]

³ politics.theatlantic.com/2009/08/gop_dems_want_to_spend_money_to_cut_medicare.php              [8/14/09]

⁴ factcheck.org/2009/08/seven-falsehoods-about-health-care/    [8/14/09]

⁵ cbsnews.com/stories/2009/08/12/eveningnews/main5237960.shtml [8/12/09]

⁶ politicalticker.blogs.cnn.com/2009/08/14/palin-warns-of-disturbing-health-care-rationing/ [8/14/09]

⁷ latimes.com/news/nationworld/nation/la-na-health-end-of-life14-2009aug14,0,4670272.story             [8/14/09]

 

 

Rethinking Keynesian Economics

Former Treasury economist Bruce Bartlett has an article in Forbes about how economist John Maynard Keynes was more conservative than liberal. Also that when we speak of Keynes we only get the stimulus part of his message; Liberals leave out the other equally important component - decrease in taxes. This is truly an insightful read.

Coping With A Layoff

What can you do to help yourself?

You go to work and get the word … you’re being laid off. Maybe it’s no surprise. Maybe it comes as a shock. The question becomes: what now?

Basically, you have three quick to-dos: leaving work with as much money as possible, securing health insurance for the interim, and arranging unemployment benefits. Beyond these items, stay calm and stay in the hunt – or alternatively, work for yourself.

Negotiate your exit. While no law requires your employer to give you a severance package, some employers do provide them.¹ Severance package or not, you may very well receive two weeks pay and perhaps compensation for unused vacation or sick days.

Don’t be meek here. If you’ve been a key employee or simply a good employee, make the case for your company to extend your health coverage a little longer or give you a true severance package. They may see the merit if you have proven yours.

In tax terms, it may be better to receive your severance pay in the form of recurring checks rather than a lump sum. If you get a lump sum, it’s quite possible you could have too much withheld.

If you know you are getting laid off in the next few months, you can request to reduce the amount of withholding taxes on your last few paychecks to give yourself more take-home pay. And if it looks like you are going to receive a lump sum severance before December 31, think about deferring that payment until 2010 so you don’t have to include it on your 2009 tax return.

Keep yourself insured. If you can sign up as a spouse for the plan offered by your spouse’s employer, it makes sense to do it as soon as you can. If that doesn’t describe your situation, then the options are extending coverage through COBRA or keeping up the payments on private life or disability insurance that your company provided.

If you sign up for COBRA at the moment, the federal government will subsidize 65% of the cost for nine months as a result of the federal stimulus. In COBRA, you will have to pay the entire premium on your health insurance plus a 2% administrative fee.¹

Sign up for unemployment benefits. As few of us have bank accounts equal to six months or a year of salary, it is wise (not demeaning) to sign up for these benefits. You will want to do so ASAP, because it may take a few weeks for that first check to arrive. In some states, you can receive unemployment checks even if you have been given a severance package – although you may have to wait until the entirety of the severance is issued to you before jobless benefits can follow.¹

Remember that the federal government is pulling out all the stops right now. Take advantage of the federal economic stimulus effort, which is directing $500 million toward helping the jobless find jobs. New search assistance, education, and retraining programs are available. The government is also boosting unemployment payments a bit and elongating parameters of eligibility. Currently, the average weekly unemployment check in a America is about $300. Jobseekers can receive unemployment benefits for up to 46 weeks – up to 59 weeks in states where the unemployment rate tops 6% for more than three months in a row, which would be just about everywhere right now. Under the stimulus, weekly unemployment checks will increase by $20 – and the first $2,400 of unemployment payments will be tax-exempt.¹

Press flesh, not just keys. Despite the buzz surrounding job boards like Monster.com, Dice.com and CareerBuilder.com, an article this winter in the San Francisco Chronicle noted that only about 2-3% of new hires find their jobs through such resources. About 15% of new hires find work directly by applying at a company’s web site, and about 65% find new jobs through that old standby – networking.²

Older employees may actually cope with layoffs better. That’s what a collaborative study coming from the Federal Reserve Bank of Chicago and Columbia University has just concluded. It found that laid-off workers younger than 55 experience a much greater increase in “mortality hazards” than their older counterparts – stress and health risks, addictions, and negative personal behaviors. Perhaps this is because workers over 55 are somewhat less likely to deal with making ends meet and the pressures of raising a family; they may have already thought about (and planned for) a retirement transition and they have the options of Medicare and Social Security now or in the near future.³

Have you been given a gift? That’s one way to look at it: one door closes, another opens. If you have an entrepreneurial ambition, or just suspect that like many Americans you will one day have to be your own boss, then maybe now is the time to talk over your options with a potential mentor – a friend who owns a business or makes a living as an independent professional in your industry. If you are mature and want or need to keep working, you might even think about a life or career coach – someone who can help you see the full range of possibilities, including those that you may not have considered five or ten years ago.

Citations.

¹ smartmoney.com/personal-finance/employment/4-ways-to-survive-a-layoff/        [7/2/09]

² sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/12/20/BU2914Q1JE.DTL         [12/20/08]

³ usnews.com/blogs/the-inside-job/2009/07/01/the-correlation-between-health-employment-and-layoff-fears.html         [7/1/09]

Health Care Reform

President Obama’s vision may be carried out – in part.

 

The U.S. is the only developed nation without a comprehensive national health care system. President Barack Obama aims to change all that with a massive reform bill to bring health insurance to 46 million Americans without it over the next 10 years.

Huge reform, huge questions. How much will this cost? Who will pay for it? Could the reform put private health insurers out of business? Will it work? These are just some of the questions swirling around the proposed legislation.

Huge compromises. The most controversial aspects of the bill may soon be watered down. Part of that has to do with cost; part of it has to do with appeasing the private sector. The Senate and House must reconcile different versions of the bill. In the House version, 95% of Americans would be eligible for health coverage; in the Senate version, 97% of Americans would qualify.^1,2

Possibly kaput: the government-sponsored option for health insurance. Could private health insurance companies hope to compete with the federal government? Private insurers railed against their proposed new competitor – and last week, Sen. Kent Conrad (D-ND), a Senate Finance Committee member, told Bloomberg News that talk was shifting away from that concept in the Senate and toward nonprofit cooperatives. The House version of the bill still includes the government-run plan.¹

Also possibly kaput: mandatory health insurance for employees. In the original conception, businesses would pay federal fines in the future if they refused to provide health coverage to workers. According to Sen. Conrad, the Senate version of the bill would ask businesses to shoulder a portion of the cost of Medicaid coverage received by their workers, or 100% of the Medicaid tab for certain workers poor enough to qualify for a tax credit that could help them buy health insurance.¹

If the bill passes, the amount of employer-provided health benefits exempt from income taxation might be limited. Sen. Max Baucus (D-MT), current chair of the Senate Finance Committee, has suggested a $15,000-$17,000 ceiling on that tax exclusion.¹

Definitely disliked: the proposals to fiddle with private Medicare plans. The Obama administration has set goals of ending overpayments to Medicare Advantage, which it claims would save the government $177 billion by 2019. In that same time frame, it also wants to use Medicare reimbursements to reduce preventable hospital readmissions – for a conceived $25 billion in additional savings.³ The Obama reforms would also give Medicaid members a bigger prescription drug discount, while reducing that discount for high-income Medicare members.⁴

In testimony before the House energy and commerce panel, Blue Cross and Blue Shield Association senior VP Alissa Fox contended that any cuts in Medicare funding “would cause millions of Medicare Advantage enrollees to lose their coverage and lead to significant reductions in benefits or increases in premiums for millions more.” In addition, Blue Cross, Blue Shield and America’s Health Plan recently presented a letter to Sen. Ted Kennedy (D-MA), referencing a Milliman study that found the average family of four pays $1,700 a year more than they should in health insurance premiums due to Medicare and Medicaid underpaying hospitals and physicians.^1,5

Obama claimed before the American Medical Association that his reforms “will actually extend the life of the Medicare Trust Fund by 7 years and reduce premiums for Medicare beneficiaries by roughly $43 billion over 10 years.”³

The proposed total costs: apparently almost $1 trillion. Sen. Baucus and Sen. Chuck Grassley (R-IA) worked in late June with the Senate Finance Committee to whittle down the House’s $1.6 trillion version of the bill to less than $1 trillion.²

Who pays for it? Tax increases and savings would fund the reforms. More specifically, the President has talked about cutting back the value of the itemized deductions available to the wealthiest American taxpayers. House Ways and Means subcommittee chair Rep. Richard Neal (D-MA) said other ideas a payroll tax and a value-added tax. The Senate seems to prefer the idea of taxing employee health benefits.⁶

More change likely to come. “We are still early in this process," Obama noted Thursday. “We have not drawn lines in the sand.” Expect those sands to shift further as legislators and lobbyists exert pressures on another of the President’s ambitious reforms in July.

Citations.

¹ bloomberg.com/apps/news?pid=20601103&sid=aki1sLcOe4GM         [6/26/09]

² cnn.com/2009/POLITICS/06/25/health.care.proposal/            [6/25/09]

³ usatoday.com/news/washington/2009-06-15-obama-speech-text_N.htm           [6/25/09]

⁴ forbes.com/2009/03/03/obama-health-plan-lifestyle-health_obama_health_budget.html                              [3/3/09]

⁵ usatoday.com/news/washington/2009-06-23-health-congress_N.htm                  [6/23/09]

⁵ washingtonpost.com/wp-dyn/content/article/2009/06/18/AR2009061804053.html                         [6/18/09]

Obama's Plan to Overhaul the Financial System

The President calls for more regulation – and a more powerful Federal Reserve.

 

Since September 2008, the federal government has committed $10.5 trillion to fixing the economy – bailing out Citigroup, Bank of America, AIG, Freddie Mac, Fannie Mae, Chrysler and General Motors in the process.¹ To try to prevent further economic nightmares, President Obama is proposing a “sweeping overhaul” of the U.S. financial system on a level unseen since the 1930s.

An answer to “an absence of oversight.” If enacted, Obama’s plan would hand more power to the Federal Reserve, the Treasury and the Federal Deposit Insurance Corporation, fuse two federal agencies into a single regulator of the nation’s largest banks, create a new agency to regulate consumer financial products, police hedge funds and private equity funds, and rein in the use of mortgage-backed securities.

The Fed’s role. Under the plan, the Federal Reserve would become the top watchdog of the U.S. financial system. It would regulate the banks, brokerages, insurers and hedge funds deemed too big to fail, see that they are keeping enough capital in reserve, and respond quickly in a crisis. The goal is to avoid another Bear Stearns or Lehman Bros. debacle, and the system-wide shock that could follow.²

The Treasury could get veto power. Treasury Secretary Timothy Geithner would chair a regulatory council to work side-by-side with the Fed as it monitors the biggest financial firms. This council could potentially veto emergency loans made by the Fed to financial companies.³

The FDIC could expand its reach. It would gain the ability to seize and unwind not only banks, but other kinds of financial firms.³

The OTS dies. If Obama has his way, the much-criticized Office of Thrift Supervision would merge with the Office of the Comptroller of the Currency. This revamp would create a new entity, a National Bank Supervisor to monitor all deposit-taking thrifts. Under current rules, some banks may essentially select their regulator.^2,3

The CFPA would be born. That’s the Consumer Financial Protection Agency. This new office would regulate credit cards, mortgages and other consumer-marketed financial products. If would set guidelines for banks and bank holding companies, and if they got out of line, it would punish them with penalties and fines.²

More scrutiny over hedge funds & private equity funds. Under the plan, all private equity and hedge funds would have to register with the Securities and Exchange Commission, and throw open their books when regulators demand.⁴

 

A tighter rein on securities and derivatives. Banks that package and sell mortgage-linked securities (and other debt-linked securities) would have to keep at least 5% of those securities on their books. In fact, all financial firms that originate a security would have to retain 5% of the “securitized exposure” and maintain an investment interest in that security even if it is resold. The idea here is to discourage the promotion of exotic home loans and other complex financial products that were half-understood by investors and borrowers.^3,4

 

Will all this change really take place? It will likely take several months for any version of the Obama proposal to become law. The plan notes that the Fed has “the most experience to regulate systemically significant institutions.” But some Capitol Hill opinion leaders are especially concerned about expanding the Fed’s powers. Even Sen. Chris Dodd (D-CT) is unconvinced. “Giving the Fed more responsibility at this point … is like a parent giving his son a bigger … faster car right after he crashed the family station wagon,” he noted, referencing the testimony of former Federal Reserve examiner Mark Williams.⁵

 

“You cannot convene a committee to put out a fire,” Treasury Secretary Tim Geithner noted June 18, defending the idea of the Fed as the “first responder” to any future financial crisis. But Sen. Richard Shelby (R-AL) pointed out that the Fed could end up regulating “insurance companies, hedge funds, asset managers, mutual funds, and a variety of other financial institutions that it has never supervised before.” Rep. Jeb Hensarling (R-TX), a vocal critic of last fall’s Wall Street bailout, says the plan “disappointed” him: “They essentially leave all the old regulatory infrastructure in place, and then they simply add on to it.” When it comes to regulation of the financial industry, however, many consumers and individual investors may feel the same as Sen. Dodd, who called for “focused and empowered, aggressive watchdogs rather than passive enablers of reckless practices.”⁵

 

Citations.

¹ money.cnn.com/news/storysupplement/economy/bailouttracker/ [6/15/09]

² bloomberg.com/apps/news?pid=20601103&sid=aJTI_GE0pf8Y          [6/17/09]

³ money.cnn.com/2009/06/17/news/economy/regulatory_reform/index.htm?postversion=2009061712&eref=rss_topstories  [6/17/09]

⁴ topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/financial_regulatory_reform/index.html    [6/17/09]

⁵ features.csmonitor.com/politics/2009/06/19/congress-%E2%80%93-including-democrats-%E2%80%93-in-no-hurry-to-approve-obamas-regulatory-reform/               [6/19/09]

GM Files for Bankruptcy

It finally happens. What does it mean?

June 1, 2009 was a sad day for General Motors: the venerable automaker, now financially vulnerable, filed for Chapter 11 bankruptcy (and was kicked out of the Dow Jones Industrial Average).^1,2

This shocked no one, and the stock market didn’t suffer. The Dow gained more than 2% on June 1, pushing past the 8,700 mark.³ But GM’s bankruptcy will have a huge impact on lives and communities in Southest Michigan and across the nation.

What’s the goal here? The goal is for GM to arrange financing so that it can leave Chapter 11 as a viable, albeit leaner, company. GM is still in business, although it is closing or idling two (eventually, perhaps four) assembly plants, three stamping plants, five powertrain manufacturing plants, and three service and parts warehouses. It is also aiming to cut 21,000 of 54,000 factory positions held by members of the United Auto Workers.¹ It plans to reduce its dealerships by 1,100 or more within the next 18 months.⁴ It is projected that Oakland County, MI alone will lose 6,600 jobs.⁵

The government-supervised reorganization will leave a new GM with new owners, at least for the time being: under the plan, the U.S. government will hold 60% of GM, the UAW 17.5%, the Canadian government 12% and GM bondholders 10%.¹ If GM can’t viably reorganize, a Chapter 7 bankruptcy (liquidation) would be the next option – but GM is likely “too big to fail” in the eyes of the Obama administration.⁴

What about employees and their pensions? The most depressing aspect of the bankruptcy is the many non-union GM employees who now have no job security. Pay cuts, job cuts, office closings – GM can request permission to do any of this from the presiding bankruptcy judge. (Whether it would make such a request is anyone’s guess.) While GM is supposed to honor new contracts forged with the UAW, it also legally has the option to ask a bankruptcy judge if it can void them and renegotiate terms with the union.⁴

As for pensions and healthcare benefits, the White House said May 31 that pensions and health care benefits of GM workers would simply transfer to the new GM. While GM could legally request the bankruptcy judge to reduce or terminate pensions and health benefits for non-union workers, no one is saying it will. Terminating pensions would require a trial, and even if the judge ruled in GM’s favor, pension plan participants would still get about one-third of their benefits via arrangement with the Pension Benefit Guaranty Corporation. If GM’s non-union retirees were to lose healthcare benefits, they would be covered by Medicare.⁴

Could the GM bankruptcy be as quick as Chrysler’s? So everyone hopes. It appears Chrysler might be out of bankruptcy this summer, if Fiat purchases the bulk of its assets as planned. Of course, Chrysler has a buyer. GM is trying to restructure without a buyer – and with a lot of help from Washington and Ottawa. The US government has loaned GM $19.4 billion and could commit up to $30 billion more. The Canadian federal government and the Ontarion provincial government are collectively directing $9.5 billion to GM.¹

What might the new GM look like? As widely discussed, GM will likely restructure itself around its strongest assets and liquidate or sell the rest.

Pontiac is out of the picture, and Saturn may be out of the picture also if GM can’t get a buyer. Saab has a for-sale tag on it. Hummer looks to have a buyer, and most of Opel is supposed to be sold to a Canadian supplier (Magna) and a Russian car maker (GAZ). Any fuel-efficient vehicles aside, GM’s days of dominance appear long gone. In fact, the forecasting firm IHS Global Insight thinks that the new GM will be about a third smaller, and capture only about 15-16% North American market share in the next few years.⁶

Citations.

¹ usatoday.com/money/autos/2009-06-01-gm-bankruptcy_N.htm?loc=interstitialskip            [6/1/09]

² reuters.com/article/domesticNews/idUSTRE55043Y20090601    [6/1/09]

³ smartmoney.com                [6/1/09]

⁴ nytimes.com/2009/06/02/business/02primer.html?ref=business                [6/1/09]

⁵ detnews.com/article/20090601/AUTO01/906010376/1361/Oakland-County-staggered-by-an-estimated-6-600-GM-job-losses     [6/1/09]

⁶ popularmechanics.com/automotive/new_cars/4319666.html      [6/1/09]