This comprehensive Act affects various aspects of financial services.  However, I wanted to discuss one part of it today that deals specifically with whistleblowers.  A whistleblower is someone who raises a concern about alleged wrongdoing occurring in a government or governmental entity or a private or public corporation or an organization or agency that is expected, by the public at large, to be operating within the bounds of the law.  The term comes from British police who would often blow a whistle when they saw someone committing a crime.  Whistleblowers often face retaliation from their employers and/or fellow employees.  The whistleblower protection in this Act is designed to encourage employees to come forward when they see something that they know is wrong.  It’s also designed to discourage employers from doing things unethical or illegal.

The main part of this Act that encourages whistleblowing is that the whistleblower can receive from 10% to 30% of amount recouped by the SEC or IRS.  So it could be like winning the lottery.  Factors to be considered in determining the amount of the award include the significance of the information provided by the whistleblower, the degree of assistance provided by the whistleblower, the programmatic interest of the SEC in deterring violations of the securities laws by making awards to whistleblowers, and other factors that the SEC may establish by rule or regulation.

This Act makes a CEO look around his or her board room and think, “Is that guy going to blow the whistle on me?”  Or, “Am I going to blow the whistle on him?”

If you know me, you know that I’m not a huge fan or Barney Frank, Chris Dodd, or any of their cronies.  Of course, I think that it’s good to encourage honesty in both private enterprise and government agencies.  We all know that unethical and dishonest practices don’t JUST occur in the private sector.  But at the same time, does this turn people into money hungry, whistleblowing lottery chasers?  Is this Act going to better protect consumers, or will it just hurt business? 

I would love to hear your opinion on this and see what real Americans think.  Please enter your comments at the end of this post!

If you would like to view the actual provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173), Click HERE.

Obama is may extend Bush tax cuts even for those earning more than $250k per year.

By JOHN D. MCKINNON And JANET HOOK
President Barack Obama is open to considering the extension of all Bush-era tax cuts for a year or two, the White House confirmed Thursday, putting to a likely end any debate over whether to extend the breaks for high-income families.

Instead, Congress is poised to grapple with a different set of questions when it returns this month for a final session of the current term: How and for how long should lawmakers grant an extension?

Until now, Mr. Obama and Democratic congressional leaders have said they wanted to extend Bush-era breaks for the middle class only, defined as families making below $250,000 a year. Republicans and a growing number of Democrats favor extending the cuts for all income levels, including the highest, for some period of time. The cuts will expire Dec. 31 unless Congress extends them.

Mr. Obama dropped his explicit opposition to extending breaks on the top income brackets, saying Wednesday he was willing to negotiate with Republicans on the issue. Asked about it Thursday, White House Press Secretary Robert Gibbs said Mr. Obama would “be open to having that discussion.”

Also Thursday, Mr. Obama appeared to offer another hint that he’d be flexible on the issue. He emphasized the need for certainty on taxes, a recent rallying cry for Republicans and business advocates, and termed it “critical to maintain our recovery.”


“I take any signal that the president may be backing off his pledge to raise taxes on small businesses as a good sign, but we have to see where this discussion goes,” said Rep. Dave Camp (R., Mich.), in line to become chairman of the Ways and Means Committee in January.

Many small-business owners file under personal-income tax rates, and Republicans contend that allowing the Bush-era tax breaks on higher earners to expire would hit about half of small-business income. That could slow investment and job creation at a critical juncture in the sluggish economic recovery.

Senior Democratic aides suggested it would be all but impossible to pass an extension of only lower-income tax cuts, given opposition from both Republicans and some Democrats, although Democratic leaders could still bring it to a vote and force Republicans to vote against it. A higher cutoff for extending the breaks—say, annual income of $1 million—also remains an option.

But more Democrats appear set to part with their leadership and support extending all the breaks, at least for a period.

“I think there are a number of senators on our side who will at least listen very carefully to the analysis that would lead you to support a … one- to three-year phaseout of the upper-income tax breaks,” said Sen. Robert Casey (D., Pa.) in an interview late last week.

Many House Democrats still oppose extending the higher-earner breaks. But House Democrats are losing power following big losses in this week’s election, and likely would defer to whatever deal the White House and Senate can reach.

The debate is now set to focus on how lawmakers would design such an extension.

Some Democrats are considering combining a short-term extension for higher earners with a longer-term extension for middle-class earners—an approach aides term “decoupling.” Sen. Casey said a number of his Democratic colleagues were interested in that idea to give certainty to middle-class families while limiting the impact on the government’s already-large deficits.

Republicans said Thursday they opposed decoupling. One House GOP aide called it a nonstarter. It would allow Mr. Obama and congressional Democrats to simply let the higher-earner breaks expire in a year or two; with only the higher-income cuts at stake, Republicans would have little negotiating leverage.

“Decoupling is a tax hike, period,” said one Republican Senate aide.

Republicans want to keep the time frame on tax cuts the same for all income levels. The question then becomes whether lawmakers decide on a short-term extension of a year or two, or a longer-term extension of, say, five years.

The negotiations could drag on into January, when the newly elected 112th Congress is to be seated with much larger Republican numbers.

White House officials said Thursday, however, that they wanted to complete the debate before the Jan. 1 expiration of the Bush-era breaks, to avoid problems that would result, including higher withholding rates for tens of millions of working Americans.

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This example gives you an idea of the monthly premiums you could pay for 20 years of life insurance:
Preferred No Nicotine Use:

You can pay fixed premiums for term insurance that stay the same for a set number of years (5, 10, 15, 20, 30).  There is also term insurance that will refund you your premiums at the end of the term if you are still alive.  Or, for additional flexibility, you might consider a Universal life policy that has the ability to build up cash value that will grow tax-deferred.  These types of policies are great for people who are maxing out their company retirement plans and still want to save more inside a tax deferred vehicle.

If you own a life insurance policy that is more than 4 years old, you should review it to see if you can get the same or better coverage from a new policy for less.  Life insurance costs continue to decline due to people living longer and longer.  So even though you are now older, your premiums could still be lower for the same coverage.  Or, you may be able to increase your coverage without having to pay more for it (assuming your health has not changed significantly).

Interested?  Call or e-mail me today to learn more and make one of the most important promises to your family.  It’s worth at least a few minutes to review and get a second opinion.

SEC Chairwoman Mary Schapiro

Lawmakers and regulators are jumping on the fiduciary-duty bandwagon after the Securities and Exchange Commission’s fraud charges against Goldman Sachs and subsequent hearings. Several senators have or plan to introduce amendments to the financial overhaul legislation, and SEC Chairman Mary Schapiro has backed the standard. “I believe that broker-dealers and investment advisers providing the same services, especially to retail investors, should meet that same high fiduciary standard,” Schapiro said.

Many of the firms who bought investments from Goldman Sachs and other broker-dealers could have avoided huge losses had their been a fiduciary standard in place at the time.  A fiduciary is required to act in the best interest of their clients.  They also have to fully disclose sources of compensation and any possible conflicts of interest.  This way the client knows more fully what they are getting into, and why the advice or recommendation is being made.

This is the standard that investment advisors and Certified Financial Planner certificants are held to, and it protects the client. 

I don’t agree with everything that the SEC does.  They totally ignored the Madoff scandall even though they were given many clear warnings, tips and documentation about what was going on.  But I do have to agree with them on this point, that anyone giving investment advice should have to act as a fiduciary to their clients.  There are too many ways that financial companies and brokers can take advantage of consumers, and many of them do.  Sure, if an investment is a registered mutual fund, the fees and expenses are all disclosed in the perspectus.  But most people won’t read them, or if they do read them it’s too confusing to understand.

If you are working with a Certified Financial Planner Certificant, you know you have someone who is held to a higher standard.  Now that doesn’t mean that all CFP’s are honest, you should always check out someone’s backround and complaint history.  But if a CFP doesn’t act in the best interest of a client, he won’t be a CFP for long.  The CFP Board will strip someone of the designation if they are found to be acting dishonestly.  If you’re working with an independant CFP who doesn’t have sales goals that they have to meet, then you know they don’t have someone looking over their shoulder to make sure they’re selling enough of this or that.

This all comes down to doing the right thing for the client.  When you’re putting your faith and trust in an “expert”, you shouldn’t have to worry about someone lining their pockets for the “expert advice” they are giving you.  It’s definitely getting better out there, but we have a long way to go.

NEW MILLS, England — A few months ago, 71-year-old Chrissie Maher got a mailing from her bank titled “Personal and Private Banking — Keeping You Informed.” Baffled by its blizzard of terms such as “account facility limit,” Ms. Maher replied in simpler language.

“The leaflet needs much more thought if it is to be understood by your customers,” she said in a letter to Royal Bank of Scotland Group PLC. “As it stands, it should be renamed ‘Keeping You Confused.’ ”

After critiquing the pamphlet’s “tortuous and ambiguous sentences,” she redrafted it, changing terms like “maximum debit balance” to “the most that can be owed.”

RBS may have picked the wrong woman to target with financial mumbo jumbo. Ms. Maher is the founder of the Plain English Campaign, a 30-year-old group whose stated goal is to stem “the ever-growing tide of confusing and pompous language” that “takes away our democratic rights.”

Over the years, Ms. Maher and her group have battled police agencies, expansion planners at Heathrow Airport, and the “frequently bizarre language” of the European Union. (At issue: phrases such as “unlock clusters,” “subsidiarity” and “sector-specific benchmarking.”) She has blasted local government on the use of “worklessness” to refer to unemployment and once attacked the president of the U.K. Spelling Society over his claim that the apostrophe is “a waste of time.”

Now a grandmother of 11 who works out of a small farm in the hills outside Manchester, Ms. Maher is focusing on the current scourge of financial jargon.

In Plain English

Examples of Plain English’s suggested changes to government and business financial jargon:

From U.K. tax regulations:

Before: “The revocation by these Regulations of a provision previously revoked subject to savings does not affect the continued operations.”

After: “If a provision (requirement) which would have produced savings has been revoked (cancelled), it does not prevent the savings being made in another way.”

From the small print on a bank account agreement:

Before: “Interest earned on balances of less than £50,000 will be paid subject to tax status. Interest on balances of £50,000 or more will be paid without the deduction of tax.”

After: “We will pay interest on balances of less than £50,000 depending on your tax circumstances. We will pay the interest on balances of £50,000 or more without taking tax off.”

From a bank customer mailing:

Before: Without prejudice to condition 2.1 (b), the maximum debit balance allowed on each account is the cardholder credit limit.

After: The most that can be owed an each account is called the cardholder credit limit.

From a typical government document:

Before: “If there are any points on which you require explanation or further particulars we shall be glad to furnish such additional details as may be required by telephone.”

After: “If you have any questions, please phone.”

– Source: Plain English Campaign

“Families are losing their homes because of jargon-filled credit agreements,” says Ms. Maher, an energetic presence in a crocheted sweater and eyeglasses. “Language has been misused and has contributed to the economic disaster.”

An RBS spokesman acknowledged that the wording in the mailing sent to Ms. Maher “was not as clear as it might have been,” and that as a result of her letter, the bank is taking steps to improve the clarity of such pamphlets.

But Ms. Maher says specific regulation is needed. Earlier this year, she wrote to Prime Minister Gordon Brown urging that regulatory bodies such as Britain’s Financial Services Authority establish standards of “plain English” for banks and businesses, and fine them for “churning out…incomprehensible gobbledygook.” A spokesman for Mr. Brown’s office declined to comment on the prime minister’s correspondence.

The U.S. Securities and Exchange Commission codified good writing in 1998 with its Securities Act Rule 421(d) — or in plain English, the “Plain English Rule” — which applies to the cover page for a prospectus. The rule outlines six principles for good writing, including using the “active voice” and not using “multiple negatives.”

In July, Ms. Maher’s group testified before a Parliament committee holding a public hearing on language use in government. Members of the public submitted complaints over what one called “eye-wateringly arcane” language such as “conventional procurement” and “optimism bias” used to describe government financial initiatives. Another lamented the use of the word “investment” when the government means “spending.”

This is the last of a 3-part series in discussing the factors that have contributed to this great recession we are in.  You can view Part 2 Here. and you can view Part 1 Here. 

When doing personal financial planning, you have to take steps to prepare yourself for these types of economic situations.  They are sure to happen again in the future, and you can start preparing yourself now for it.  I would welcome any comments you may have about this topic.

Today I will discuss the last 3 factors that I feel have contributed to this current recession, which are:  Credit default swaps, unemployment, and the stock market.

Credit Default Swaps

This is something that most of you had probably never heard prior to this mess.  In my 15 years of personal financial planning, I had never heard of them until a few years ago.  A credit default swap is similar to an insurance policy that is supposed to protect the buyer from losing money.  A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a swap or loan) goes into swap (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy, or even just having its credit rating downgraded.

There are some differences between a CDS and real insurance though.  With insurance, the buyer of the policy typically has some insurable interest such as owning the debt that he is insuring.  With a CDS, the buyer doesn’t even have to own the security.  Sellers of CDS’s do not need to be regulated entities, and do not have to keep reserves to pay off buyers.  However, major CDS sellers are subject to bank capital requirements.

One of the largest sellers of CDS’s was AIG, and they were selling a lot of them that were designed to insure against losses in mortgage securities.  When the mortgages started to blow up, everyone was coming to AIG to get paid, and they couldn’t pay them.  They didn’t have enough money to pay everyone they had sold them to.  You all know how the government stepped in to bail them out and cover their losses with tax payer dollars.

Unemployment

This is always a part of a recession, as businesses struggle and close up shop, people lose jobs.  As they lose jobs, they have less money to spend.  Since most of our economy stands on the back of consumer spending, more businesses start to struggle.  Then more businesses start to make cutbacks, and more jobs are lost.  It’s a downward spiral that won’t stop until things finally hit bottom and equalize.  In August 2009, the unemployment rate rose to 9.7% with 14.9 million people being unemployed.  Since this recession started in December 2007, the number of people who are unemployed has risen by 7.4 million and the unemployment rate has risen 4.8%.  So this is obviously affecting a lot of people, and you can see why there is so much less money being spent by consumers.

Stock Market

Some people may think that the stock market crashing causes recessions to start, and that recoveries make them end.  While there is definitely a correlation to the performance of the stock market and the economic cycles, the market doesn’t really cause recessions to start or end.  I would say that instead, the stock market is a good indicator of where we are at in an economic boom or recession.  There is certainly a relationship between the two.  The stock market peaked in November 2007.  When markets near high points, you might be surprised to know that those are the times that more people are adding new money into the market.  Stock mutual fund in-flows usually peak at about the same time that the market is peaking.  And when the market bottoms out, that’s when most people are taking money out of the market.  That’s just the time that you should be putting money back in.  But psycologically, it’s very difficult for someone to sell their stocks when they’re hitting highs, or buy them when they’re hitting lows.

This peaking out of the stock market in late 2007 was just another sign that a big correction was coming.  And there was nothing that anyone could do to stop it.

People ask me all the time, “Mark, why is it that when I buy something it goes down, and when I sell it, it goes back up?”  It’s really very strange how this happens to almost all individual investors.  This is one major benefit to hiring a professional money manager to help you manage your investments.  That person can take a lot of the emotion out of the investment process which helps them to do the opposite of what your gut tells you to do.  As the market hits highs, your advisor can take profits and rebalance your portfolio to protect money that you have made.  Then, when the stocks decrease in value, he or she can add more money to them at the the time when you should be buying more.

In the previous post I discussed Globalization, Low Savings, Cheap Money, and Deregulation.  In this post I will cover Derivatives, National Debt, Declining Dollar, and Bank Leverage.

Derivatives

A derivative is a financial instrument that is derived from some other asset, index, event, value or condition (known as the underlying asset). Rather than trade or exchange the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset. A simple example is a futures contract: an agreement to exchange the underlying asset at a future date.

Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative.

Wall Street geniuses came up with a way to use derivatives to trade almost anything.  They came up with derivatives for all these mortgages that were flooding the market, and people started trading them like crazy.  The investment banks who were creating these instruments were making money hand over fist, and so were the investors who were buying them.  At least for a time.  One problem was that most people didn’t really understand how they worked, and how risky they really were.

National Debt

Under President Reagan our National debt reached the $1 Trillion mark, which seemed pretty scary at the time.  Today it’s just over $11 Trillion.  Most people can’t even comprehend how big a Trillion dollars is.  Just to put it in perspective: $1 billion dollars is a thousand millions.  $1 trillion is a thousand billions.  It really is hard to put your mind around how big that really is.  Our country produces enough goods and services that our national debt is not unaffordable.  But we can afford it right now because interest rates are so low.  China currently owns about 20% of that debt (in the form of T-Bills and other U.S. Treasuries) and Japan owns another 20%.  46% of it is owned by Americans.  So it’s not really the size of the debt that concerns me, becase relative to our income as a country, we can currently afford it.  But if interest rates were to jump up, the interest alone on that debt could crush us financially.  The interest alone on our national debt currently makes up about 20% of our country’s budget.  If interest rates went back up to 6%, our interest payments would double!  This is like an individual having an adjustable rate mortgage on their house, and they are at the mercy of current market rates, and they can’t really refinance!  Now think about this, if you own stock in a company and you see that the company is starting to amass a lot of excess debt, what will you likely think?  You will become concerned that they may not be able to pay back all that debt, and you may consider getting rid of that stock.  Right now, China and Japan are looking at our situation and saying, “I wonder if they are goign to be able to pay back all that debt?  Do we really want to hold onto this debt?”  And what happens when everyone starts selling or trying to get rid of something?  That’s right, the value of it goes down.  And when the value of a bond goes down, the interest rate goes up.  So our level of national debt has us in a very precarious position.

Declining Dollar

A weak dollar does have some positive things that can help stimulate an economy.  When the US dollar is weak, it costs less to buy things here in the US.  This can stimulate the purchase of US goods, foreign tourists coming here,  and people coming here to go to college.  But there are downsides too.  Oil is traded in US dollars, so having a weak dollar is likely to make the price of oil go up as other countries buy up the oil with their more valuable currencies.  It also makes businesses here vulnerable to hostile takeovers by foreign buyers.  But the biggest risk ties back in to our interest rates.  A weak dollar and low interest rates go together.  If the dollar stays weak, eventually foreigners are not going to want to buy our debt at such low interest rates.  This will mean that interest rates will have to go up so that they will buy our debt.

Bank Leverage

With all the money being made by the banks writing all those mortgages, they got greedy.  They started to over extend themselves by writing more mortgages than they should have written, and even lending out their reserves.  As we already discussed, many of these loans were NINJA loans (No Income, No Job or Assets).  Real estate appraisers got in on the NINJA loan action by appraising houses for more than they were really worth so that even people with bad credit could get 100% financing to buy houses.  Some banks would pressure the appraisers to appraise a house at a certain value or else they wouldn’t send them any more business.  When things started to turn south in the real estate markets, speculators just walked away from properties.  They owed the bank more than the property was worth, so they would just leave the keys on the counter and walk away.  Many banks have already gone under.  As of today, 94 banks have failed in 2009 and been taken over by FDIC, with many more on the way.  Commercial real estate loans haven’t even hit the fan yet.  Credit card defaults are still growing.  And car loan defaults will be the last thing to bring up the rear.

Come back soon to see the last part of this 3-part series!

Globalization

The North America Free Trade Agreement (NAFTA) went into effect on Jan 1, 1994.  This was an agreement between the United States, Canada & Mexico that was meant to open up trade between these countries.  The idea of this globalization was that if we bought products from Mexico we would raise their standard of living, and eventually they would all start buying more products from us.  While this agreement did increase trade between the countries, the long term effects have been somewhat damaging to us.  Currently we buy as a country about $1 Trillion in goods per year from other countries, and we sell about $200 Billion of our good to them.  That’s a trade deficit of about $800 Billion per year.  Why is this?  Because we don’t really have anything to sell to them.  Everything is now made in other countries like Mexico, China & India where labor costs are so much cheaper.  Why would they buy things from us when they already have it, and they make it, and it’s cheap.  This has made our country very dependent on other producing countries for goods that we need.  It has also weakened us financially.

Low Savings

Currently the United States is the richest country in the world, but we have the lowest personal savings rate in the world.  In China the personal savings rate is 30%, in Japan it’s 16%, and Germany saves about 12%.  Up until 1989 our savings rate was 11%.  Today we are at -1%.  That’s right, people are spending  ALL of their income and then some every year.  Because of inflation, today’s wages are the same as they were 20 years ago.  Yet our standard of living has increased dramatically.  How is that possible?  Today about 90% of couples under the age of 50 have both spouses working.  We’ve also been using home equity, credit cards, and our savings to maintain our standard of living.

It used to be that people set up sinking funds to pay for purchases like new cars, vacations, Christmas, etc.  They would set aside a little money into their separate sinking fund account each month so that when it was time to go on the vacation the money was there.  Today, people just put it on the credit card or get a loan for it, and then make monthly payments on it (with interest).  This lack of savings has made our country very vulnerable to financial crisis.

Cheap Money

The Federal Reserve started making it very easy to borrow money when they reduced interest rates to near zero levels.  This was an effort to “prime the pump” and get money flowing, and it worked.  Banks were able to borrow money from the government at 1% interest rates, and then lend it back out in the form of home mortgages at 5 – 6% rates.  They were making money hand over fist, and Wall Street was getting flooded with mortgages.  So many mortgages in fact, that something had to be done to deal with all of them.

Deregulation

During this same time there was much less reguation going on in the banking industry.  With a lack of regulation, many banks got greedy and started giving loans to people who really shouldn’t have had them.  People got really good at falsifying loan documents in order to get a loan.  This is where the NINJA loans started to run wild.  NINJA stands for No Income, No Job or Assets.  Here’s how they worked.  Lets say a person comes in looking for a loan to buy a house and they have an income of $5,000 per year.  The mortgage officer might have said something like, “Well lets just put an extra zero on the end of that income and make it $50,000, since a zero isn’t worth anything anyway.”  “And you don’t have a job, you just watch TV all day?  Let’s put down that you’re an entertainment executive with Dish Network.” and so forth.  These were the kinds of people who the banks were lending out cheap money to on a daily basis.  Can you see how this was setting us up for the big crash?

Look for “The Perfect Storm – Part 2″ for more on this topic.