Hill's Personal Finance

US Automakers get a Loan

This may be good news for auto stocks, and boost the auto industry.

 Congress earmarks $25 billion for the auto industry. While everyone was watching Capitol Hill for news about the Wall Street bailout, Congress quietly approved the funding of a loan program to help U.S. automakers and parts suppliers. Starting in 2009 or 2010, eligible auto industry firms will be able to take out 25-year, low-interest government loans to help upgrade their factories to build more fuel-efficient vehicles.1

 Money to help Detroit compete. For months, U.S. automakers have struggled and watched the public shift away from SUVs and trucks toward small, fuel-efficient cars. This loan program may give them a chance to rework their model lineups, and eventually change consumer perception.

The automakers must meet some strict criteria to qualify for these loans. The money is intended to be used to develop cars, trucks, and SUVs that will get 25% better fuel economy than their direct competitors. The loan program guidelines also include a preference to direct the money toward the modernization of auto manufacturing plants at least 20 years old, even if they have been mothballed.2

The arrangement will let auto manufacturers and automotive industry suppliers borrow the money at about 5%, instead of the approximately 15% interest rate they might have to shoulder in the financial markets. (That amounts to saving $100 million on a $1 billion loan.)2

 The loans aren’t limited to the Big Three. Automakers and parts suppliers with at least a 20-year footprint in the United States can qualify. That means the U.S. divisions of Nissan and Honda can apply for these loans as well, which certainly will not sit well with General Motors, Ford and Chrysler.3 But the program can’t get rolling soon enough, especially for policymakers in Michigan – for example, Bloomberg.com, reporting the average estimates from five analysts, predicts GM sales will be down 26%, Chrysler sales down 34%, and Ford sales down 22% for September.4

Whether you are in the auto industry or not, it’s time to think about your money. Where are you at financially? What lifestyle or financial objectives would you like to realize someday? A practical financial plan may help you pursue them – and that’s a good reason to confer with a respected financial advisor.

Citations.

1 cnn.com/news/newsfeeds/articles/apwire/88ec3c8a043edf070c3095fa46ce790d.htm [9/29/08] 2 freep.com/apps/pbcs.dll/article?AID=/20080928/BUSINESS01/809280366&imw=Y [9/28/08] 3 usnews.rankingsandreviews.com/cars-trucks/daily-news/080929-Auto-Bailout-Passes-Big-Three-to-Get-Big-Check-from-Uncle-Sam/ [9/29/08] 4 bloomberg.com/apps/news?pid=20601087&sid=aA2OteanMb9Q&refer=home

Citigroup Buys Wachovia

The FDIC brokers another banking merger.

Technically, this isn’t a bank failure … but technicalities aside, Citigroup’s move to buy Wachovia’s banking assets Monday morning was engineered by the Federal Deposit Insurance Corporation. Once again, the FDIC took “timely actions” to save a lender, in the words of Federal Reserve Chairman Ben Bernanke.¹

The market reacted predictably to the rescue: the Dow Jones Industrial Average was down about 250 points by early afternoon Monday, and not just because of anxiety over the bailout plan vote.² The Wachovia buyout and the overseas failures of some major European banks made investors jittery.

What does this mean if you have money at Wachovia? It means you’re now going to be with Citigroup. This was not a bank failure, it was a bank merger – and mergers usually don’t impact deposit holders. For the record, the FDIC insures up to $100,000 per depositor in individual accounts, and protects up to $100,000 per person in jointly held accounts. It also insures up to $250,000 for individual retirement accounts invested in CDs or cash.³

By the way, the sale does not include Wachovia’s securities assets: it will still own its A.G. Edwards Inc. brokerage and its Evergreen family of mutual funds.⁴ Wachovia Insurance Services will become a stand-alone operation.⁵

Are we going to see any more bank failures? In terms of major lenders, maybe not. The Wachovia bailout might represent a stopping point of sorts, at least in the US, where Wachovia was the last of the “big guns” in trouble. But the fact remains that many smaller banks are struggling. According to an FDIC estimate, 117 banks and thrifts were facing financial troubles in the second quarter of 2008, and we don’t have the third quarter data in yet.¹

The silver lining. Of course, Citigroup is not exactly on easy street. It hasn’t turned a profit for three quarters. Yet the new federal bailout plan could really help Citigroup, by giving it a chance to unload illiquid assets for a higher price than it paid for them. You see, while the bailout package prevents lenders from profiting on the sale of most troubled assets to the Treasury, it doesn’t prohibit making a profit from assets acquired in a merger, a buyout, or via bankruptcy.¹

So, do you have concerns about your money? If you do, it’s understandable. Every day seems to bring a “new development”. Who can help you sort it out? A qualified financial advisor. Talk to the financial advisor you know and trust today, or ask one in your community for his or her perspective.

Citations.

¹ ap.google.com/article/ALeqM5jBpTstzcj2LSvdE72t247CeMqW6QD93GE59G0     [9/29/08]

² money.cnn.com/2008/09/29/markets/markets_newyork/?postversion=2008092911    [9/29/08]

³ seattletimes.nwsource.com/html/businesstechnology/2008192638_pfprotection210.html          [9/21/08]

⁴ bizjournals.com/portland/stories/2008/09/29/daily1.html          [9/29/08]

⁵ tradingmarkets.com/.site/news/Stock%20News/1908784/      [9/29/08]

AIG and Your Annuity

What has happened, and what might happen next?

 

Since AIG promotes itself as the world’s premier provider of fixed annuities, you may be worried if you have an annuity – or life insurance policy - with the worldwide insurance giant. But in reality, you probably don’t have much to worry about. Let’s look beyond the media frenzy and into the reality of AIG and its current situation.

No need to panic. The federal government now owns an 80% stake in AIG, as a result of an $85 billion loan.¹ So Uncle Sam is now the majority shareholder in the company. That ought to make anyone feel a little better.

Beyond the federal intervention to prop up AIG, you also have state guaranty associations ready to protect annuity owners and life insurance policy owners. So even in a worst-case scenario, the picture is not as bleak as the headlines would have you believe.

What if my annuity is sold? Last week, AIG did announce plans to sell off some of its subsidiaries, such as its annuity business. Insurance laws in most states allow for a seamless transition when one insurer buys the annuities or policies of another. So if AIG sells your annuity contract or your life insurance policy to another insurance company, the terms and conditions of your contract or policy should stay the same.²

If your annuity should remain with AIG, the $85 billion Federal Reserve loan is designed to help AIG maintain assets sufficient to meet its contracts and claims. This unique government support for your insurer is a compelling reason to stay the course - and to avoid the hefty surrender charge that may accompany a withdrawal.

How healthy is AIG right now? Well, AIG still faces a challenge. The

U.S.

government didn’t guarantee its debt the way it did with Fannie Mae and Freddie Mac; it simply offered AIG a two-year loan with an 11.3% interest rate.³ But state regulators and insurance industry analysts across the nation don’t anticipate a bankruptcy.

Last week, National Association of Insurance Commissioners president (and

Kansas

state insurance commissioner) Sandy Praeger said: "We have a very strong message for consumers: if you have a policy with an AIG insurance company, they are solvent and have the capability to pay claims."⁴

State protection. There are state guaranty associations that protect life insurance policy owners and annuity owners. If AIG were to go bankrupt and liquidate its assets, you would still have protection for your assets thanks to these agencies.

If you own a fixed annuity, state guaranty associations generally provide up to $100,000 protection in case of insurer bankruptcy – and some states go as high as providing $300,000 or more in protection.⁵

If you own a life insurance policy, state guaranty associations usually provide up to $100,000 protection in cash surrender or withdrawal value, and at least $300,000 in death benefits.⁵

If you have a variable annuity, the investment subaccounts are your assets – creditors snapping up an insurer’s assets won’t be able to touch them. The part of the contract promising a payout from the insurer is usually covered by state insurance regulations.⁵

Care to talk? It is a momentous time financially, and I know you are certainly thinking about your money. I welcome your questions and thoughts, and I invite you to call me or e-mail me to learn even more about the state of your investments and your financial options.

 

The State of Fannie Mae, Freddie Mac, and Indy Mac

Where things stand in mid-July.

Fannie Mae, Freddie Mac: stocks rise, concerns ease. Fannie Mae and Freddie Mac shares rose on July 17 and July 18 after falling 60% in the previous five trading days.¹ Though their shares were still down more than 70% for 2008 through the end of last week, the federal government proposal to inject taxpayer money into both companies via the purchase of newly issued stock helped their fortunes in the market.¹

The concern last week was that Fannie Mae and Freddie Mac were heading toward collapse. Both government-sponsored firms convert mortgages sold by banks into bonds sold to investors, a process that brings liquidity to home loan companies. Last week, the Federal Reserve offered Fannie Mae and Freddie Mac access to its emergency cash, and on July 13, the Treasury Department said it would temporarily raise its line of credit to them and make an unprecedented equity investment in them if necessary. Both mortgage giants welcomed the assistance but publicly maintained that they were adequately capitalized.

As Fannie and Freddie guarantee about half of America’s residential mortgages, anything like failure would be disastrous for the housing market and the economy. Since July 2007, both firms have lost a total of $11 billion.²

But last week, things looked more optimistic. Securities and Exchange Commission chairman Christopher Cox pledged that the SEC would tighten regulations concerning short sales of major financial stocks. Consequently, the value of Fannie Mae shares had almost doubled by Friday, and Freddie Mac shares have risen 80%.³ Friday, Freddie Mac announced that it had registered its stock with the SEC in order to generate $5.5 billion through the sale of common and preferred shares. (Fannie Mae registered its stock with the SEC in 2003.)³

IndyMac: the FDIC restores control. At the start of July, officials at the bank spun off from Countrywide Financial insisted it would not collapse, despite its specialty of originating (and selling) stated-income loans, jumbo mortgages and sub-prime loans.⁴ On July 11, federal regulators took IndyMac over. Over 200,000 IndyMac depositors were covered by federal insurance (up to $100,000 of their account balances); 10,000 more IndyMac clients had $1 billion of uninsured deposits, making them eligible to receive 50 cents on the dollar for deposits above $100,000, with the possibility of recouping more after IndyMac is sold.⁵ IndyMac clients with joint accounts or retirement accounts could immediately withdraw sums of greater than $100,000.⁶

Last week, a few IndyMac customers found that other banks wouldn’t take their cashier’s checks, or were told the checks would take weeks to clear. That wasn’t true. Under federal law, other banks must make IndyMac cashier's check deposits of up to $5,000 available for withdrawal in one business day. But, cashier’s checks for more than $5,000 can be subject to a hold of as long as nine business days.⁶

For the record, if you are an IndyMac customer and you are having problems with a check, you may contact the FDIC toll free at 1-866-806-5919. If you have other banking issues concerning IndyMac, you may call the Federal Office of Thrift Supervision at 1-800-842-6929.⁶

A word about SIPC coverage. You know what the FDIC does for troubled banks, but as an investor, you may be wondering if there is any protection in case something happens with your investments. Did you know that the Securities Investor Protection Corporation (SIPC) offers coverage for your investment accounts?

Should a broker/dealer fail or have to liquidate assets, SIPC coverage kicks in (provided that broker/dealer is an SIPC member; nearly all are). The coverage doesn’t protect against market risk or market downturn; it simply covers the value of the securities. It is limited to $500,000 per client, including up to $100,000 for cash.⁷ General creditors of the broker/dealer cannot share in these distributions. Also, many investment broker/dealers have put what is termed “excess SIPC” coverage in place, for those statistically small chances in which the SIPC coverage would not be able to settle a claim against the broker/dealer.

SIPC coverage does not cover all types of investments. Coverage generally applies to stocks, bonds, mutual fund and other investment company shares, notes, and other registered securities. But it does not apply to commodity futures contracts, commodity options, currency or fixed annuity contracts.⁷

Do you have some questions? Maybe this article made you think about the state of your investments and savings – where you have invested, where you have your money today. If you have questions regarding your finances, now is an excellent time to speak with a qualified financial advisor.

Citations. ¹ bloomberg.com/apps/news?pid=20601087&sid=aQKmgV2qfzTc&refer=home                           [7/18/08]

² business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4345872.ece     [7/18/08]

³ money.cnn.com/2008/07/18/news/freddie_bounceback.fortune/               [7/18/2008]

³ money.cnn.com/2008/07/18/news/freddie_bounceback.fortune/               [7/18/2008]

⁴ latimes.com/business/la-fi-indymac1-2008jul01,0,2858219.story  [7/1/08]

⁵ bloomberg.com/apps/news?pid=20601087&sid=asHgTtu1PNx4&refer=home [7/17/08]

⁶ money.cnn.com/news/newsfeeds/articles/apwire/f38c855e00512869896951adc357148a.htm [7/17/08]

⁶ money.cnn.com/news/newsfeeds/articles/apwire/f38c855e00512869896951adc357148a.htm [7/17/08]

⁷ finra.org/InvestorInformation/InvestorProtection/SIPCProtection/index.htm          [7/18/08]

⁷ finra.org/InvestorInformation/InvestorProtection/SIPCProtection/index.htm          [7/18/08]

Is There Such a Thing as a Free Lunch

Financial opportunity … or scam? Here are a few tips to help you avoid making a costly mistake.

Legitimacy is in the eye of the beholder. When someone invites you to a lunch or dinner financial seminar, are they trying to sell you something? Probably. Is it a scam? Not necessarily. It all depends. Often someone (for example, an insurance agent) will sell a product via a seminar or an invite-only lunch or dinner gathering. Sometimes they will hold a “meeting” or even come to your house. This could be a very well-meaning person with ideas that could really help you, or it could be someone who just wants to make a quick buck. The products they try to sell you may be totally legitimate, but that doesn’t mean that buying that product is the right move for you.

What don’t you need? Often, the “scam” is simply pushing you to buy a genuine product that’s simply not right for you. For example, if you have hardwood floors, do you need a carpet cleaning device? No. But that doesn’t make the device defective. It could be a perfectly good carpet cleaner, you simply don’t need it. If the person trying to sell you that device knows you don’t have carpet, then they may be trying to swindle you in order to make a quick buck. The legitimacy of the product isn’t always the concern, it’s whether or not you need that product.

It may work for you, but how well? Sometimes the product being offered would work for you, but that doesn’t necessarily mean it’s the best fit. For example … let’s say your house is too hot during the summer months, and you’d like to cool down. Someone might encourage you to buy some lemonade. While that might cool you down in the short term, wouldn’t a fan work better? And to take it a step further, someone else could offer you a central air conditioning system. While this may keep your house much cooler than the fan, you’d want to be sure you fully understood the costs of installation, maintenance and any ongoing costs before making that purchase.

Ask questions. Many, many questions. A good rule of thumb with investing is … if something sounds too good to be true, it probably is. When it comes to financial products or vehicles, there is no such thing “easy” money. A scam artist might tell you an investment is “risk-free”, but that is often a stretch. For example, many “guaranteed” investments are not actually guaranteed by the FDIC, only by the company that is pitching them. Try to think rationally, maintain a healthy amount of skepticism, and ask any and all questions that may come to mind. Some important questions to ask may be … What are the specific risks involved? What are the actual costs? How long-term is the investment, and/or how long until you might see a return?

The fear factor. Often, skilled salesmen will use emotion as a tactic to help them sell something to you more quickly. The emotion can vary, but often it involves instilling a fear of some kind. Fear of financial ruin, for example, or fear of leaving loved ones unprotected. The fear can be very real and often very valid, but the solution they offer might not be. If you feel you’re being steered into something based on emotion, or if you feel a great deal of pressure, it may be best to wait and decide later. The next day, the next week … take your time. Someone looking out for your best interest shouldn’t be offended if you’d like to learn more or “sleep on it” before making a decision.

Speak with someone qualified. It’s not always wise to make decisions based on what a friend, relative or colleague has done. While that person may be very intelligent, and/or while the investment may be doing very well for THEM, it still may not be a wise move for YOU. Your friend may be well-meaning, but that doesn’t mean they are qualified to give you financial advice. If you are unsure, talk to a qualified, experienced financial professional.