After adding about $140 Billion dollars worth of tax cuts and spending to the bill, the House Republicans sided with bipartisan lines and passed the Rescue package. Now that the bill has been signed into legislation, what now? Over a 159,000 jobs were lost in the month of September alone and this country is heading towards a vicious halt. Sec. Paulson is now tasked with purchasing these bank assets to free up the credit markets so that institutions will begin lending to each other and businesses again.
In previous blogs I have supported the bailout and I am not wavering, but as I stated if the banks do not begin to lend then the bailout was all in vain. Lending means to all not just to one segment of the community. To re-start this economy we can not sit back and wait for trickle down to consumers; Sec. Paulson has to immediately lay out new lending requirements for Fannie Mae/Freddie Mac and have a team immediately look into which mortgages can be re-financed immediately and which ones are going to take some time. We have to get as many assets refinanced as soon as possible otherwise we will waste the $700 billion.
My suggestion is to offer a 40-45 year fixed mortgage @ 4.5% to anyone that is in foreclosure, pending foreclosure, slow pay, in a variable rate mortgage and still has the means to pay the note. Next offer anyone in a high interest rate the ability to re-fi to a lower rate. Once the re-fi is complete, the mortgage would be transferred to Fannie Mae or Freddie Mac to manage. This could potentially increase the quality of the mortgage backed securities that the bailout will buy, thus proving to be profitable to the American taxpayer. It will delay the build up in equity in the home if only the required monthly is paid, however, the goal will be to get the house to a affordable payment so the homeowner can pay more than what is required.
Another positive benefit is this refinancing strategy could potentially free up some immediate liquidity for consumers thus providing the lubrication for restarting our economy. If consumer spending increased this will potentially lead to an increase in a business' budget thus requiring more people to be hired. The flow of money has to re-start, but I am all for a period of 3 months where Americans are spending less and saving more. Saving will be a primary catalyst to increasing current deposits on hand with banks, thus allowing for institutional lending to resume with confidence.
Patience and prudence must prevail during this period of our life. The unfortunate circumstance is that our country is in a election year which adds more political red tape to the equation. We have to create more jobs...allow for stem cell research to resume, allow for more technological and alternative energy innovation, etc. As a country, we have to focus on wealth building, education, and health care; this is the only way we will be able to restore our super power status.
Saturday, October 4, 2008
Thursday, October 2, 2008
Discussion of the Day: Mandatory 401K Participation
At a roundtable discussion the other day, a few of us raised this question "Should the U.S. Government pass legislation to mandate participation in Company sponsored Retirement plans (401K, 403B, etc)". QDIA Legisation was passed last November that allows companies to automatically enroll employees into their retirement plans and expand default investment options, but do you feel that expanding this to a mandated program would be a good option?
The theory behind this is requiring all U.S. employees 18 and older to contribute 1% of their pre-tax income to a 401K or Qualified retirement plan. In addition, their employer would be required to match that 1% dollar for dollar with fully vested dollars.
As it relates to the default investment option, the 1% would be invested into the most conservative investment such as a money market, cash equivelant, etc. The employee would be able to change this investment mix at anytime. The only stipulation to changing the alignment is that at least 10% of the overall portfolio value must remain in a conservative cash investment at all times(Again this is my theory).
During our discussion a good question was raised "Should the employee be allowed to access the funds on the account at anytime?" My response to that is that anything contributed above and beyond the mandated 1% could be used for a 401K loan, Withdrawal, etc. Even in the event of termination of employment mandated investment (principle and earnings) must be rolled over to another qualified retirement account. If the employee did not have one, one could be opened for them at the time of distribution. Now since retirement savings, under this theory, would be mandatory one could explore lowering the retirement age to 55 for example.
Another good question that was raised is "How would management fees be assessed?" The management fee associated with the mandated contribution would not be able tp exceed 10 basis points or .1%. Anything above and beyond that would be subject to standard management and expense ratio fees. This way costs are controlled at all times since individuals would be required to participate in the program.
There are many other aspects to discuss however this program could prove to be beneficial for all. One it would lower the number of senior citizens that are unprepared financially for retirement. Secondly, it would aim to build wealth amongst the middle and working class Americans. Next, it would also go to addressing rising concerns about the Social Security system and how young people nowadays will not be able to benefit from the program in the future. This program could potentially eliviate some of the pressures on Medicare as well since individuals should be in a position to take care of some if not all of their medical expenses. There still needs to be healthcare reform in this country, but generating wealth could be a step in the right direction.
If this were ever to become a significant topic of discussion, I assume there would be a lot of nay sayers, but how could one be against this plan? 1% of a person's pre-tax income is an amount that would more than like not be missed from the paycheck. It equates to $1 per $100 of earned income which would not set a household back. Will this strategy make millionaires, probably not, but it is a good start in the correct direction.
The theory behind this is requiring all U.S. employees 18 and older to contribute 1% of their pre-tax income to a 401K or Qualified retirement plan. In addition, their employer would be required to match that 1% dollar for dollar with fully vested dollars.
As it relates to the default investment option, the 1% would be invested into the most conservative investment such as a money market, cash equivelant, etc. The employee would be able to change this investment mix at anytime. The only stipulation to changing the alignment is that at least 10% of the overall portfolio value must remain in a conservative cash investment at all times(Again this is my theory).
During our discussion a good question was raised "Should the employee be allowed to access the funds on the account at anytime?" My response to that is that anything contributed above and beyond the mandated 1% could be used for a 401K loan, Withdrawal, etc. Even in the event of termination of employment mandated investment (principle and earnings) must be rolled over to another qualified retirement account. If the employee did not have one, one could be opened for them at the time of distribution. Now since retirement savings, under this theory, would be mandatory one could explore lowering the retirement age to 55 for example.
Another good question that was raised is "How would management fees be assessed?" The management fee associated with the mandated contribution would not be able tp exceed 10 basis points or .1%. Anything above and beyond that would be subject to standard management and expense ratio fees. This way costs are controlled at all times since individuals would be required to participate in the program.
There are many other aspects to discuss however this program could prove to be beneficial for all. One it would lower the number of senior citizens that are unprepared financially for retirement. Secondly, it would aim to build wealth amongst the middle and working class Americans. Next, it would also go to addressing rising concerns about the Social Security system and how young people nowadays will not be able to benefit from the program in the future. This program could potentially eliviate some of the pressures on Medicare as well since individuals should be in a position to take care of some if not all of their medical expenses. There still needs to be healthcare reform in this country, but generating wealth could be a step in the right direction.
If this were ever to become a significant topic of discussion, I assume there would be a lot of nay sayers, but how could one be against this plan? 1% of a person's pre-tax income is an amount that would more than like not be missed from the paycheck. It equates to $1 per $100 of earned income which would not set a household back. Will this strategy make millionaires, probably not, but it is a good start in the correct direction.
Monday, September 29, 2008
A Sad Day for the American Economy
A letter to my readers:
It's a sad day for America today; our economy and homeowners needed that legislation. The 3rd revision was a strong policy that could of helped build a foundation for the U.S. to regain stability in the equity and credit markets. Instead many people lost 20-30% in value in their 401Ks and retirement accounts today after already being down 20-45% YTD. We have lost 5 large banks (Merrill Lynch, Lehman Brothers, Wachovia, Washington Mutual, Bear Sterns) of which 3 were historical institutions (Merrill Lynch, Bear Sterns, Lehman Brothers), unemployment is up to above 6%, 10's of thousands of layoffs earmarked due to consolidation in the markets. In addition, small businesses and consumers no longer have access to credit to sustain operations or life and now the economy teeters the balance of falling into a deep recession of which may take years for us to pull ourselves out.
No one wants to spend this money however, something needs to happen. Popular media is blaming Wall Street, however, we need to blame not only Wall Street, but Fannie Mae/Freddie Mac, (Underwriting No Doc loans and accepting a large number of Alt-A loans), Home builders, Americans dangerous passion of obtaining more credit than liquidity, our Government for lack of oversight, etc. We didn't get here overnight and we won't get out of it overnight, however, we need a clear starting point and this bailout will be one. There is no guarantees that it will work however homeowners in bad mortgages, foreclosure, pending foreclosure had the ability to re-negotiate with the Fed for better rates to save their homes, preferred equity would of been transferred to the Fed from companies participating in the bailout program allowing for taxpayers to realize capital gains as the markets recover along with dividend premiums paid quarterly. Also, Executives lost the ability to earn golden parachutes as a result of their companies rebounding, and anyone who owned preferred equity in Fannie Mae and Freddie Mac that bailed on the company in recent months thus aiding the share price to plummet would be required to pay higher taxes. This was much more favorable legislation than the 1st 2 proposals.
Review the new legislation and weigh the pros and cons, the unfortunate thing is that this could be the beginning to the end of the U.S. being a true Economic Super Power for years to come.
Let's pray that something can happen before the election otherwise whomever takes the White House may already be in a hole to deep to dig themselves out of in 4 years.
Jouran
It's a sad day for America today; our economy and homeowners needed that legislation. The 3rd revision was a strong policy that could of helped build a foundation for the U.S. to regain stability in the equity and credit markets. Instead many people lost 20-30% in value in their 401Ks and retirement accounts today after already being down 20-45% YTD. We have lost 5 large banks (Merrill Lynch, Lehman Brothers, Wachovia, Washington Mutual, Bear Sterns) of which 3 were historical institutions (Merrill Lynch, Bear Sterns, Lehman Brothers), unemployment is up to above 6%, 10's of thousands of layoffs earmarked due to consolidation in the markets. In addition, small businesses and consumers no longer have access to credit to sustain operations or life and now the economy teeters the balance of falling into a deep recession of which may take years for us to pull ourselves out.
No one wants to spend this money however, something needs to happen. Popular media is blaming Wall Street, however, we need to blame not only Wall Street, but Fannie Mae/Freddie Mac, (Underwriting No Doc loans and accepting a large number of Alt-A loans), Home builders, Americans dangerous passion of obtaining more credit than liquidity, our Government for lack of oversight, etc. We didn't get here overnight and we won't get out of it overnight, however, we need a clear starting point and this bailout will be one. There is no guarantees that it will work however homeowners in bad mortgages, foreclosure, pending foreclosure had the ability to re-negotiate with the Fed for better rates to save their homes, preferred equity would of been transferred to the Fed from companies participating in the bailout program allowing for taxpayers to realize capital gains as the markets recover along with dividend premiums paid quarterly. Also, Executives lost the ability to earn golden parachutes as a result of their companies rebounding, and anyone who owned preferred equity in Fannie Mae and Freddie Mac that bailed on the company in recent months thus aiding the share price to plummet would be required to pay higher taxes. This was much more favorable legislation than the 1st 2 proposals.
Review the new legislation and weigh the pros and cons, the unfortunate thing is that this could be the beginning to the end of the U.S. being a true Economic Super Power for years to come.
Let's pray that something can happen before the election otherwise whomever takes the White House may already be in a hole to deep to dig themselves out of in 4 years.
Jouran
Sunday, September 28, 2008
Bailout of Wall Street is Near Reality...Will it be a Good Plan?
Here is the tentative agreement that looks poised to pass in the next few days (http://www.reuters.com/article/marketsNews/idINN2732937820080927?rpc=44):
Following are provisions compromise legislation is expected
to incorporate, based on a draft bill and comments from
lawmakers about the state of negotiations.
- The bill would create a Troubled Assets Relief Program
(TARP) to purchase mortgage-related assets originated or issued
on or before March 14, or any assets if needed to promote
financial stability.
- $700 billion overall to be authorized in installments of
$250 billion. That could be increased to $350 billion upon
notification to Congress by the president.
- Assets could be purchased from any financial institution
having significant operations in the United States.
- Government to get warrants for equity in participating
companies as a way of protecting taxpayers and allowing them to
benefit from any profit gains.
- Foreclosure mitigation for Americans at risk of losing
home. However, a provision House Democrats had sought to help
save homes in bankruptcy proceedings has been dropped.
- Restrictions on executive compensation at companies that
participate.
- Incorporates House Republican proposal to allow for
private-sector funded mortgage insurance program as an option
for Treasury secretary.
- Financial Stability Oversight Board comprised of the
chairmen of the Federal Reserve, Securities and Exchange
Commission and Federal Deposit Insurance Corp, and two members
appointed by Congress to oversee activities of the program.
- Requires a government investigation into causes of
crisis, with report delivered to Congress by June 2009.
- Regular and detailed reports on transactions and other
activities under the rescue program.
- Establishes a congressional oversight panel that would
also submit a report on regulatory reform no later than Jan.
20, 2009, the date a new president takes office.
- Would direct 20 percent of any future profits from the
bailout fund to the Affordable Housing Fund and the Capital
Magnet Fund to meet U.S. housing needs. House Republicans,
however, have made clear they oppose this provision.
- Authorizes a temporary money market mutual fund guarantee
program for up to one year. Requires U.S. Treasury to restore
any funds to the Exchange Stabilization Fund that had been used
for that purpose and prohibits their further use.
- Requires federal financial regulatory agencies to
cooperate with federal law enforcement to investigate fraud or
misrepresentation with respect to financial products.
- Investors who sold preferred stock in mortgage finance
giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), between Jan.
1, 2008, and before Sept. 7, 2008, to pay higher ordinary
income taxes on any gains rather than the lower capital gains
tax. The government announced the seizure of Fannie Mae and
Freddie Mac on Sept. 7.
(Compiled by Reuters' Washington bureau, editing by Patricia
Zengerle)
It appears to be a bipartisan agreement with both sides of the aisle agreeing to joint concessions in order for a deal to get done. I think it is a great foundation for moving forward and hopefully establishing some stability in the capital and credit markets. The key to success will be how soon will the banks begin re-lending money? I think if banks decide to freeze lending, then this plan was in vain and will cause the taxpayers to shoulder a significant burden. Banks should begin generating loans immediately and get rid of products such as no-document mortgages (aka liar loans), ARMs for individuals who don't have strong credit or are buying too much home, and the issuance of loans greater than 3xs household income. Sub-prime lending has to continue in this country, especially now since many individuals have been negatively impacted by this crisis, this market probably has grown by 2 fold. The question that still is left to be understood is will Congress allow for Fannie Mae and Freddie Mac to still operate as a Government Sponsored Entity (GSE) and be publicly traded? It's my opinion that they should remain a publicly traded entity with more Government Oversight, however, many Americans lost money in these companies and they should be given the opportunity to re-coup some of those losses.
If this legislation is passed there will be several significant advantages like homeowners who not currently in the bankruptcy court will be allowed to re-negotiate their mortgages to more favorable rates, any company that participates in the program their executive compensation will be subject to mandated guidelines, and the Federal Government will be able to receive preferred stock warrants which generally pay dividends and trade at higher prices as a means to generate repayment for the taxpayer dollars that are being distributed. These concessions are big and make the legislation more taxpayer friendly rather corporate friendly. The next step will be constructing favorable job creation legislation, however that is a topic for another discussion.
Many Americans are not high on this legislation, but it is something that is needed right now. Moving forward we all have to look at our finances more responsibly, begin to shifting each household from credit base to more savings deposit based thus allowing for each household to become more liquid and able to handle rising pressures that may affect our everyday lives. Many lessons have been learned as a result of this crisis and it is up to everyone to put those lessons learned into action and attempt to avert this catastrophe from happening again in the future.
Following are provisions compromise legislation is expected
to incorporate, based on a draft bill and comments from
lawmakers about the state of negotiations.
- The bill would create a Troubled Assets Relief Program
(TARP) to purchase mortgage-related assets originated or issued
on or before March 14, or any assets if needed to promote
financial stability.
- $700 billion overall to be authorized in installments of
$250 billion. That could be increased to $350 billion upon
notification to Congress by the president.
- Assets could be purchased from any financial institution
having significant operations in the United States.
- Government to get warrants for equity in participating
companies as a way of protecting taxpayers and allowing them to
benefit from any profit gains.
- Foreclosure mitigation for Americans at risk of losing
home. However, a provision House Democrats had sought to help
save homes in bankruptcy proceedings has been dropped.
- Restrictions on executive compensation at companies that
participate.
- Incorporates House Republican proposal to allow for
private-sector funded mortgage insurance program as an option
for Treasury secretary.
- Financial Stability Oversight Board comprised of the
chairmen of the Federal Reserve, Securities and Exchange
Commission and Federal Deposit Insurance Corp, and two members
appointed by Congress to oversee activities of the program.
- Requires a government investigation into causes of
crisis, with report delivered to Congress by June 2009.
- Regular and detailed reports on transactions and other
activities under the rescue program.
- Establishes a congressional oversight panel that would
also submit a report on regulatory reform no later than Jan.
20, 2009, the date a new president takes office.
- Would direct 20 percent of any future profits from the
bailout fund to the Affordable Housing Fund and the Capital
Magnet Fund to meet U.S. housing needs. House Republicans,
however, have made clear they oppose this provision.
- Authorizes a temporary money market mutual fund guarantee
program for up to one year. Requires U.S. Treasury to restore
any funds to the Exchange Stabilization Fund that had been used
for that purpose and prohibits their further use.
- Requires federal financial regulatory agencies to
cooperate with federal law enforcement to investigate fraud or
misrepresentation with respect to financial products.
- Investors who sold preferred stock in mortgage finance
giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), between Jan.
1, 2008, and before Sept. 7, 2008, to pay higher ordinary
income taxes on any gains rather than the lower capital gains
tax. The government announced the seizure of Fannie Mae and
Freddie Mac on Sept. 7.
(Compiled by Reuters' Washington bureau, editing by Patricia
Zengerle)
It appears to be a bipartisan agreement with both sides of the aisle agreeing to joint concessions in order for a deal to get done. I think it is a great foundation for moving forward and hopefully establishing some stability in the capital and credit markets. The key to success will be how soon will the banks begin re-lending money? I think if banks decide to freeze lending, then this plan was in vain and will cause the taxpayers to shoulder a significant burden. Banks should begin generating loans immediately and get rid of products such as no-document mortgages (aka liar loans), ARMs for individuals who don't have strong credit or are buying too much home, and the issuance of loans greater than 3xs household income. Sub-prime lending has to continue in this country, especially now since many individuals have been negatively impacted by this crisis, this market probably has grown by 2 fold. The question that still is left to be understood is will Congress allow for Fannie Mae and Freddie Mac to still operate as a Government Sponsored Entity (GSE) and be publicly traded? It's my opinion that they should remain a publicly traded entity with more Government Oversight, however, many Americans lost money in these companies and they should be given the opportunity to re-coup some of those losses.
If this legislation is passed there will be several significant advantages like homeowners who not currently in the bankruptcy court will be allowed to re-negotiate their mortgages to more favorable rates, any company that participates in the program their executive compensation will be subject to mandated guidelines, and the Federal Government will be able to receive preferred stock warrants which generally pay dividends and trade at higher prices as a means to generate repayment for the taxpayer dollars that are being distributed. These concessions are big and make the legislation more taxpayer friendly rather corporate friendly. The next step will be constructing favorable job creation legislation, however that is a topic for another discussion.
Many Americans are not high on this legislation, but it is something that is needed right now. Moving forward we all have to look at our finances more responsibly, begin to shifting each household from credit base to more savings deposit based thus allowing for each household to become more liquid and able to handle rising pressures that may affect our everyday lives. Many lessons have been learned as a result of this crisis and it is up to everyone to put those lessons learned into action and attempt to avert this catastrophe from happening again in the future.
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