Archive for June 25th, 2010
The government is looking at ways to promote the conversion of 401(k)s and IRAs into steady payment streams after a significant decline in plan balances
By Theo Francis
(Bloomberg) — The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.
The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.
Annuities generally guarantee income until the retiree’s death, and often that of a surviving spouse as well. They are designed to protect against the risk that retirees outlive their savings, a danger made clear by market losses suffered by older Americans over the last year, David Certner, legislative counsel for AARP, said in an interview.
“There’s a real desire on a lot of people’s parts to try to encourage something other than just rolling over a lump sum, to make sure this money will actually last a lifetime,” said Certner, legislative counsel for Washington-based AARP, the biggest U.S. advocacy group for retirees.
Promoting annuities may benefit companies that provide them through employers, including ING Groep NV (INGA:NA) and Prudential Financial Inc. (PRU), or sell them directly to individuals, such as American International Group Inc. (AIG), the insurer that has received $182.3 billion in government aid.
The average 401(k) fund balance dropped 31 percent to $47,500 at the end of March 2009 from $69,200 at the end of 2007, according to a Fidelity Investments review of 11 million accounts it manages. The Standard & Poor’s 500 Index tumbled 46 percent in that period. The average balance of the Fidelity accounts recovered to $60,700 as of last Sept. 30 as the stock market rebounded.
There is “a tremendous amount of interest in the White House” in retirement-security initiatives, Borzi, who heads the Labor Department’s Employee Benefits Security Administration, said in an interview.
In addition to annuities, the inquiry will cover other approaches to guaranteeing income, including longevity insurance that would provide an income stream for retirees living beyond a certain age, she said.
“There’s been a fair amount of discussion in the literature taking the view that perhaps there ought to be more lifetime income,” Iwry, a senior adviser to Treasury Secretary Timothy Geithner, said in an interview.
“The question is how to encourage it, and whether the government can and should be helpful in that regard,” Iwry said.
While traditional defined-benefit pensions were paid out as annuities, providing monthly payments for retirees and often their spouses, workers increasingly are taking advantage of options to receive lump-sum distributions.
Only 2 percent of 401(k) plan participants convert retirement savings into an annuity on retirement, according to a July 2009 report from the Retirement Security Project, a joint venture of Georgetown University’s Public Policy Institute and the Brookings Institution in Washington.
A survey of 149 companies released on Dec. 17 by employee-benefits consultant Watson Wyatt Worldwide, now part of Arlington, Va.-based Towers Watson & Co. (TW), suggested that about 22 percent of employers with retirement savings plans offered retirees the choice between an annuity and a lump-sum distribution.
Government success in getting workers to move retirement assets into annuities may prove profitable for insurers that sell annuities, Anne Mathias, policy research director for Washington Research Group, a policy analysis unit of Concept Capital, said in an interview.
Retirement plans, including 401(k) accounts, held $3.6 trillion in assets at the end of the second quarter of 2009, while annuity investments of all kinds totaled about $2.3 trillion, according to figures from the Washington-based Investment Company Institute, a trade association for asset managers.
The top sellers of individual annuities in the U.S. include AIG, MetLife Inc. (MET), Hartford Financial Services Group Inc. (HIG), Lincoln National Corp. (LNC) and New York Life Insurance Co., according to figures from the American Council of Life Insurers for 2008. The top group-annuity sellers include ING, Prudential Financial, MetLife and Manulife Financial Corp.
Asset managers are concerned the government may go too far in encouraging annuities, said Mike McNamee, a spokesman for the Investment Company Institute. Seven in 10 U.S. households would object to a requirement that retirees convert part of their savings into annuities, according to a survey the group released today.
“Households’ views on policy changes revealed a preference to preserve retirement account features and flexibility,” the institute said in a report.
The institute also said annuities have received support from academic research and “it is unclear why individuals usually forego the annuity option” even when it is available. The survey didn’t ask about potential efforts by the government to encourage voluntary use of annuities.
Annuity sales to individuals have come under regulatory scrutiny in recent years over the size of sales commissions and whether some varieties are suitable for older investors.
John Brennan, the former chairman of Vanguard Group, the Valley Forge, Pennsylvania-based mutual-fund company, criticized annuities today as often expensive and offering little inflation protection. Americans already benefit from “the best annuity in the world, which is Social Security,” Brennan said in an interview on Bloomberg Television.
AARP’s Certner said policy makers could avoid many of those pitfalls by encouraging the use of group annuities, which are bought by employers rather than individuals and often carry lower fees, or using approaches that provide retirement income without commercial annuities.
Adding lifetime income to 401(k) plans won’t be sufficient for many workers because they can’t, or don’t, save enough to live on in old age, and Social Security often proves inadequate as more than a safety net, said Karen Ferguson, director of the Pension Rights Center in Washington, D.C.
“It’s a great idea, but how much are people really going to get out of it?” she said. A better approach would be to give employers incentives to revive defined-benefit pensions, which have languished as employers have focused on cheaper and more flexible 401(k) plans, Ferguson said.
One proposal raised by Iwry as co-author of a paper while at the Retirement Security Project, before joining the administration, has reached Congress. A bill requiring employers to report 401(k) savings both as an account balance and as a stream of income based on an annuity was introduced on Dec. 3 by Senators Jeff Bingaman, a New Mexico Democrat, Johnny Isakson, a Georgia Republican, and Herb Kohl, a Wisconsin Democrat.
To contact the reporter on this story: Theo Francis in Washington at firstname.lastname@example.org.
By Peter Gorenstein
Convicted felons and former captains of industry Jeff Skilling and Conrad Black caught a break Thursday: The Supreme Court ruled to limit the reach of a federal fraud law that prosecutors used to convict both men. The decision doesn’t set them free but does send their case back to the lower courts and opens the possibility of retrial.
“This is the worst possible time for this case to come up,” says Damien Hoffman, co-founder of Wall Street Cheat Sheet. The conviction of Skilling, Black, Enron Chairman Ken Lay, and former WorldCom CEO Bernie Ebbers helped fuel the last bull market in the mid-2000s says Derek Hoffman, Damien’s brother and business partner. “When they were put behind bars there was a turn in investor sentiment.”
What we need to fuel another bull market, the Hoffman brothers contend, is a new round of perp walks and convictions for those responsible for the crash of 2008. “So long as investors think another Dick Fuld or Bernie Madoff is lurking on the next corner, gold, guns and canned soup will seem the safer bet,” they write in a recent article.
Here’s a few of the names the Hoffman Brothers think belong behind bars
- Joseph Cassano — the former head of AIG’s financial products unit. Under his watch the company amassed massive amounts of risk that lead to the biggest bailout in U.S. history. There’s very little chance of Cassano facing time, however; Federal prosecutors recently dropped their investigation against him.
- Dick Fuld — Lehman Brothers CEO who watched his house of cards come tumbling down, bringing the global financial system to the edge of the collapse.
- Angelo Mozilo — The Countrywide CEO helped fuel the subprime madness. His company’s lack of due diligence is a prime reason for the foreclosure problem. Mozilo also co-founded IndyMac, the large California bank that was seized by the FDIC in July 2008.
- Stanley O’Neal — the former Merrill Lynch CEO pushed the firm to aggressively market and trade CDOs. O’Neal left with the firm on the brink of collapse before Bank of America purchased it. For all his good work, O’Neal was fired but left with a golden parachute and options valued at $161.5 million at the time.
- Fabrice “Fabulous Fab” Tourre — the banker at the center of the SEC’s criminal fraud complaint against Goldman Sachs. “People need to know the Goldman’s of the world don’t have politicians in their pockets and that the American markets are a safe place to put your money,” says Damien.
The Hoffman Brothers also note that during the S&L scandal of the 1980s over 1,000 people went to jail. To date only two Bear Stearns hedge fund managers have even gone on trial. Both were acquitted. Meanwhile, Skilling is serving a 24-year sentence in Colorado. For now…
By Karl Denninger
June 25 (Bloomberg) — Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said.
The ink is not yet dry and there’s no vote yet on exactly what this bill actually is and does. I’ll be doing my usual analysis once I have an actual stable copy.
But what I can tell from watching CSPAN until the wee hours, and following the process as closely as I reasonably can without crawling up Barney Frank’s skirt, this is what we got:
Banks will have to spin off SOME (but not the important parts) of their derivative operations. The parts they care about (and on which they make the most money) are not credit-default swaps, they’re interest-rate and FX swaps. Those are pretty much left alone, and that stinks. Bet on them trying to find every possible way to keep those “custom” as much as they can and thus off exchanges, even though that’s almost entirely bogus and intended only to rape the consumer of those products by hiding price discovery.
Investing in hedge funds is a red herring. Controlling them is another matter, and might in fact be worthwhile reform. We’ll see. Color me skeptical on this one until I can read the ACTUAL text as passed.
It appears that language that would prevent banks from taking positions opposite to their clients (as opposed to hedging market-making risk) has survived. This would prevent the Goldman-esque game played with various CDO structures. Again, I wait until I can read actual language before I call this good.
Increasing capital is good. Not forcing that capital to cover all unsecured lending is bad. The attempt to split the baby and keep the “credit leverage” game is clear in the legislation, but so far nothing they’ve tried has made that actually work, nor do I think it can. Thus, the major factors in the instability we experienced remain intact and that’s bad.
Fannie and Freddie are left out of it. That’s horrible. I know the banks went bananas on the possibility they’d be constrained, but they need to be constrained and the banks need to be forced to pay for their part of interacting with Fan/Fred and causing this mess. Not in this bill it won’t, and that sucks.
Much of the bill also won’t do anything immediately, as it “enables” rather than directs in and of itself. That’s very bad, as the regulatory capture process remains intact. What actual regulations will come out of this remain an open question.
On balance: Better than no bill, and Judd Gregg claiming that the bill is a “disaster” and will “dramatically contract credit” is just pure garbage. What it will do is stop a small amount of unsupportable and unsustainable lending, but nowhere near enough of it. It will not stop excessive risk-taking and risk-layering. The capital requirements aren’t stringent enough, the “Volcker Rule” was watered down to the point of being of little effect and the derivatives regulation was eviscerated.
Oh, and nowhere that I can find – thus far – is there an “or else” for either a bank or a regulation for violations of the law.
On balance, thus far, I call it this:
All bun to (try to) soothe the masses and electoral anger, no beef.
FT Reveals Orszag Resigns Over Inability To Persuade Summers And Obama Keynesianism Leads To Suffering
Submitted by Tyler Durden
As we speculated previously, the sudden and unprecedented departure of Peter Orszag, the day prior to the US Budget’s formalization (which incidentally never happened as now the US will likely not have a 2010 budget at all, for fear of disclosing to most Americans just how broke the country is ahead of mid-terms) was due to Orszag’s disagreement with the administration’s, and particularly Larry Summer’s, inability to fathom that reckless spending is a recipe for bankruptcy. As the FT reports: “Peter Orszag, Barack Obama’s budget director, resigned this week partly in frustration over his lack of success in persuading the Obama administration to tackle the fiscal deficit more aggressively, according to sources inside and outside the White House.” And so, as any remaining voices of reason realize they are dealing with a group of deranged Keynesians, soon there will be nobody left in the administration who dares to oppose the destructive course upon which this country has so resolutely embarked, which ends in one of two ways: debt repudiation, or war. And with the only remaining economic “advisers” being the trio of Summers, Romer and Geithner, you know America will somehow hit both of these mutually exclusive targets.
More from FT:
Mr Orszag, whose publicly stated reasons for leaving were that he was exhausted after years in high pressure jobs and also that he wanted to plan for his wedding in September, is seen as the guardian of fiscal conservatism within the White House.
Other members of Mr Obama’s economic team, notably Lawrence Summers, the head of the National Economic Council, have placed more emphasis on the need for continued short-term spending increases to counteract what increasingly looks like an anaemic economic recovery in the US.
Although Mr Orszag agrees with the need to push short-term spending, particularly in the Senate, which again this week failed to pass a measure extending insurance to the unemployed, the budget director has become increasingly frustrated with the administration’s caution on longer-term fiscal restraint.
Mr Orszag, whom Mr Obama has dubbed a “propeller-head” because of his brilliant facility with projections and spreadsheets, has tried but failed to convince his colleagues to “step up the action”, according to one insider.
In particular, he has collided with the political team, led by Rahm Emanuel, Mr Obama’s chief of staff, over Mr Obama’s 2008 election pledge not to raise taxes on any households earning less than $250,000 a year – a category that covers more than 98 per cent of Americans.
Economists say that would put all the fiscal emphasis on draconian – and highly unrealistic – spending cuts, or else pushing the marginal tax rates on the very rich to confiscatory levels. “Peter feels strongly that this is a pledge that has to be broken if the President is to take a lead on America’s fiscal crisis,” says an administration official not authorised to speak on the matter.
And after Barney Franks’s disastrous appearance earlier on, where the market did a shot and an uptick for every lie uttered, we can safely say that this bankrupt country truly deserves all of its elected individuals.
By Karl Denninger
There is nothing more amusing than watching the Neo-Fraudesian economists (that’s what so-called “Keynesians” actually are) run into the wall of reality at 120 mph:
Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.
Really? A “deflationary spiral”? Is that really deflation in your pocket or is it withdrawal and mean-reversion of the outrageous hyperinflationary credit policies of the previous 20 years that is FORCED when the scam runs its course and can’t find any more participants for the Ponzi Scheme?
Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed’s balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.
Really? What “key members” are those Ambrose?
The fun part of writing fiction pieces is that you never have to name your non-existent sources. The even more-fun part of it is that you can write about things that violate the laws of thermodynamics and physics, such as, for example, faster-than-light travel.
Here’s the problem with “further expansion of The Fed balance sheet” – there’s no evidence that the previous expansion did anything good. In fact, there’s plenty of evidence that it did a lot of harm by permitting institutions to claim “value” where none existed. This sort of fraud is particularly corrosive to both society and general business conditions as it is not possible for anyone to know whether their business will get “collateral relief” from such a fraudulent orgy in any future move – or whether your (correct) wager on asset prices will be turned into a loss by regulatory or legislative fiat and handout.
The capital markets serve two essential purposes in an economy: Capital formation and price discovery. They can perform neither job when the government will come in and declare the results of a race that has been run different than the actual order of the horses across the line.
“We’re heading towards a double-dip recession,” said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. “The party is over from fiscal support. These hard-money men are fighting the last war: they don’t recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again.”
The problem is that you can’t.
This is the fallacy of the Neo-Fraudesians – that if we just “expand M3″ all will be well.
No it won’t.
0% interest rates means that it is essentially free to borrow short duration money. Buying down the long end and the marketplace has driven “long money” to under 5% (30 year mortgages) but it hasn’t mattered.
It doesn’t matter because the ability of consumers to take on more debt is exhausted – they can’t afford it, no matter how low the interest. Without employment and income you can’t pay the debt service.
Businesses refuse to hire into an unstable regulatory and monetary environment, as well they should. If you’re Honda, do you hire into the possibility that Government Motors will literally gift every American a GM car? Of course not.
Is that an extreme example? Maybe. But maybe it’s somewhat like reality too, when the government will hand people thousands of dollars of other people’s money (borrowed money at that!) not go build a bridge or road, but to sit on their hands and watch television!
Credit-based economies require recessions to maintain balance. This is a trivial mathematical proof – since nobody will lend money at less than the zero-risk return, and the zero-risk return is typically somewhere near GDP growth, it therefore follows that if you maintain monetary balance (that is, credit and monetary aggregates expand at roughly GDP) it will soon become impossible to make the interest payments (since mathematically any two exponential functions will run away from one another if one exponent is larger than the other.)
There are only two ways to prevent this:
Generate (through intentional mismanagement of credit aggregates) insane inflationary “boosts”, which typically result from tampering with liquidity so that someone is effectively paid to borrow. This always generates asset bubbles.
Permit the economy to go through a recession when the credit capacity is exceeded in aggregate. This causes the borrowers and lenders who made unsupportable loans (that is, to the weakest economic actors) to go bankrupt.
In the first case you create a credit chart that looks like this:
The second prevents such a chart, and looks more like the chart through the early 1970s – specifically:
Note that the problem starts to get out of hand in the 1970s…. but the damage isn’t immediately apparent.
There are those who will argue that Nixon’s closure of the Gold Window was responsible. Nonsense. The presence or absence of a gold window and currency peg has nothing to do with whether credit aggregates are allowed to grow beyond reason.
Indeed, the debt-to-GDP numbers spiked enormously during the 1920s and 30s – even though we were on a “gold standard.”
The problem with papering over recessions is that you don’t really avoid them – you just compound and defer their effects. When the economy starts to run into credit-capacity problems you’re then driven to embed structural deficits into government spending to keep the Ponzi Scheme going. And when that fails you become Iceland or Greece.
That it will fail is mathematically certain. We argue only over the when, not the what.
“This does nothing to expand the broad money supply. The trouble is that the Fed does not understand broad money and ascribes no importance to it,” he said. The result is a collapse of M3, which has contracted at an annual rate of 7.6pc over the last three months.
M3 is irrelevant. There’s plenty of credit available but no capacity to take it down and do anything productive with it. Attempting to force-feed more credit into the system in this circumstance only causes more damage to be compounded into the system.
AEP and the other Fraudesians are attempting to fight the laws of physics and mathematics.
It’s a fight they are mathematically destined to lose, with the only remaining question being how quickly they will throw in the towel and thus stop the accumulation of damage, choosing instead to accept the harm that has thus far been accrued.
I want to talk to you about communism, but I have to tell you, that sounds like a joke. Three years ago I didn’t even think it was around; I would have mocked someone like me. But don’t fall into that trap. Open your mind and your ears — the country is in trouble.
The best thing to ever happen to communists was the red scare and Joseph McCarthy. We had beaten communism, soundly discrediting it in every sense. People viewed communists as traitors who wanted to destroy America. They crept back into unions — especially teachers’ unions — that coupled with colleges, you now had a situation where communists were starting to be the ones writing and teaching history.
Our children have grown up not knowing what communism is. They didn’t have to go through the emergency attack drills at school. They didn’t grow up hearing about the gulags. They haven’t seen the horror show of millions of mass murders and starving people at the hands of brutal communist dictators.
So now it’s cool to be a communist. T-shirts of Che Guevara are one of the most popular t-shirts around. Che was a racist and mass murderer, yet we have schools banning kids from wearing American flag T-shirts on Cinco de Mayo. If we’re going to ban shirts, how about the one with the communist killer on it? It’s not offensive because no one looks at the history of what they did.