The more things change, the more they remain the same

With GM dropping the other shoe today, I can’t help remembering a snippet of dialogue from Hitchock’s “Rear Window.” Here’s Thelma Ritter as a private nurse talking about a former patient:

“Kidney ailment, they said. Nerves, I said. And I asked myself, ‘What’s General Motors got to be nervous about?’ Overproduction, I says. Collapse. When General Motors has to go to the bathroom ten times a day, the whole country’s ready to let go.”

Especially the workers at the roughly 15 plants and 2,600 dealerships that are scheduled to be put out to pasture by the end of next year.

529 College Savings Day

Today, May 29th, has been dubbed “529 College Savings Day” due to the date 5-29.  I don’t know if Hallmark is behind it, but the more likely story is that it’s the brainchild of a creative marketing person involved in the 529 industry.  In any event, Sallie Mae has chosen today to release its study entitled “How America Saves for College.” Among the reported findings are that 92% of parents expect their children to pursue a college degree, and 48% plan to pay for most or all of the cost. And here’s another surprising nugget: 52% are saving the same amount or more for college, despite the recession. The study, conducted with the Gallup organization, has a margin of error of plus/minus 4%.

Dean of Massachusetts School of Law Asks IRS: Why was Madoff Approved as Non-Bank IRA Custodian?

In an interesting letter to the IRS, Dean Lawrence Velvel of the Massachusetts School of Law asks why Bernie Madoff was approved as a non-bank custodian for IRAs. Dean Velvel summarizes the IRS rules for approval as a non-bank trustee as follows:

To carry out Congress’ intent, the IRS has regulations requiring that, to be an approved non-bank custodian of IRAs, a company has to have a separate trust department; the assets of different accounts cannot be commingled; continuity of the company has to be insured by diversified ownership under which no one individual can own more than fifty percent of its shares; the company has to keep customers’ assets in a vault; and the company’s fiduciary records have to be kept separate from other records. The IRS also ruled that, in order to carry out its function of safeguarding the owners of IRAs, pension funds and similar monies, it has a right to inspect the books and records of any company that wishes to become or already is an approved non-bank custodian.

The Dean then proceeds to point out that Madoff met virtually non of these requirements and yet, in 2004, just when Harry Markopolos was disclosing the Ponzi scheme to the SEC, Madoff’s application was approved by the IRS.

Dean Velvel concludes:

As said, I request that you conduct an investigation of this, let me know the answer(s), and make the answer(s) public. It is no trifling matter when the Internal Revenue Service seems to have abetted the largest fraud in history by approving Madoff to be a non-bank custodian of retirement monies. It is no trifling matter when the IRS did this in violation of the intent of Congress and its own regulations. Those who lost money, the Congress, and the entire country have a right to be told the answer(s) to the question of how did this awful thing happen.

Read Dean Velvel’s full letter to the IRS here.

Beware of stranger-initiated annuity transactions

Ethical and legal issues surrounding stranger-owned life insurance (STOLI) have been in the news for the past few years. However, a similar concept has essentially flown under the radar until recently: stranger-initiated annuity transactions STAT). Like STOLIs, STATs are initiated by investors who have no apparent insurable interest in the annuity owner or annuitant. These transactions typically involve a terminally ill person as the annuity measuring life and often involve the investor making a gift or other incentive in addition to the payment of the annuity premium. The reasons for these transactions vary from simply receiving an enhanced death benefit to money laundering.
If you sell annuities, be sure to verify the source of funds, especially if the measuring life is terminally ill. Insurers and many states are taking disciplinary action for anyone participating in such a transaction.

Parsing the data on home sale prices

According to the National Association of Realtors, the median home sale price is down by 13.8% from last year because many purchases now are being made by first-time homebuyers taking advantage of distressed prices on foreclosures and short sales. And much of the country will no doubt heave a sigh of relief at the first sign that home prices (eventually, someday) are beginning to rise.

Not so fast, according to an interesting article by property valuation specialist Andrew Jeffrey, who writes a column for the always enlightening Minyanville financial infotainment web site. It points out that over the last 6-9 months, defaults on prime and jumbo mortgages are rising at a faster rate than subprime. And as those higher-end homes begin to come on the market at distressed prices, they will in turn begin to push up median home price figures–even though foreclosure on more expensive homes isn’t exactly good news for the overall housing market or economy.

But hey, we can worry about that when the stats actually start to go up, right?

The government plays financial hardball

The federal government played “hardball” with some of the largest (J.P. Morgan Chase, in particular) secured lenders encouraging them to forego their security interests in Chrysler in order to allow for a speedy trip through Chapter 11 bankruptcy. If anything, this latest act of “power brokerage” illustrates the strength of our largest commercial lender: the federal government.

What does this mean for you and me? Well, just as some large investors can manipulate the value of a company’s stock through naked short selling etc., so, apparently, can our government directly affect the value of a shareholder’s interest in a company (i.e. J.P. Morgan Chase) by affecting it’s contractual rights as a secured lender. Second, I thought we were facing a credit crisis? How does the government’s latest action encourage a lender’s interest in financing a commercial enterprise when its security rights may be compromised for the benefit of some unsecured creditors?

Volunteer for college money

On April 21, 2009, President Obama signed the Edward M. Kennedy Serve America Act. The Act, which had broad bipartisan support (imagine that!), will more than triple the number of volunteer opportunities for Americans over the next decade, from 75,000 to 250,000. In addition to expanding the popular AmeriCorps program that was created by President Clinton in 1993, the legislation will create four new service corps focused on the areas of education, clean energy, health care, and assistance for veterans. One of the main goals of the legislation is to create educational awards for volunteer service that can be used to help fund a college education.

Middle and high school students can volunteer in their communities in a new Summer of Service program and earn a $500 educational award.

College-aged students can volunteer for a year and receive $5,350 for 2010, the same amount as the maximum Pell Grant award. This stipend will increase in coming years to match future increases in the Pell Grant.

And retirees can volunteer and earn a $1,000 educational award that they can transfer to a child or grandchild.

Must see…

Walt Handelsman’s (Newsday’s Pulitzer Prize winning political cartoonist) take on the recession:

http://weblogs.newsday.com/news/opinion/walthandelsman/blog/2009/04/animation_recession_singalong_1.html

Congressional approval of 2010 budget provides estate tax certainty

Yesterday, Congress approved Obama’s budget resolution for FY 2010. The budget extends this year’s top estate tax rate of 45% and $3.5 million exemption for five more years. Though not written in stone, this does give estate planners some degree of certainty, which has been sadly lacking for the last few years.

Hope someone keeps on picking up the tab…

It will be interesting to watch the U.S. Treasury auctions of $101 billion worth of 2-year, 5-year, and 7-year notes next week. It’s the 7th straight month that the amount to be auctioned off–read “borrowed”–has risen. And that $101 billion doesn’t include the $53 billion in 3- and 10-year notes already auctioned earlier in the month, T-bills, or the 30-year bond.

Looking strictly at the denominations to be auctioned next week, here’s what we’ve collectively borrowed in the last six months:

October: $58 billion

November: $62 billion

December: $66 billion

January: $70 billion

February: $94 billion (the big increase is the result of adding the new 7-year note)

March: $98 billion

Next week: $101 billion

What’s interesting to me is how consistently and quickly it’s been going up. Add the $184 billion worth of 3-year notes (which were introduced in November and which also have risen consistently by a billion or two each month) and the $119 billion of 10-years since last October, and that portion of the debt has more than doubled since October.

Throw in T-bills and the long bond, and as they say in Washington, now you’re talking about real money.