Infamous estate fights
By Andrew Osterland
Investment News
September 11, 2011
You don't have to be a celebrity to make a famous mess of your estate planning, but it might help, according to Danielle and Andrew Mayoras, estate-planning attorneys from Troy, Mich.
They use well-publicized battles over the estates of famous people to illustrate why regular people need sound estate planning. Several famous cases are detailed on their website TrialAndHeirs.com.
“Even when there's not a lot of money involved, people fight over it, particularly in this economy,” Ms. Mayoras said.
The following estate cases provide good examples of what not to do:
Former entertainer and California congressman Sonny Bono, who died in a skiing accident in 1998 at 62, didn't have a will. His estate is still being contested in court by, among others, former wife Cher.
Lesson: Don't put it off.
Retired Supreme Court Chief Justice Warren Burger may have been a great legal mind, but he wasn't an estate attorney. He prepared his own will and cost his heirs huge sums in court expenses and taxes.
Lesson: Don't do it yourself.
James Brown, the Godfather of Soul, wanted to leave most of his estate to charity, but he never updated his will, which is being contested by the mother of one of his children.
Lesson: Update your estate plan for life-changing events — even the purchase or sale of a business.
Zsa Zsa Gabor, the ailing 94-year-old celebrity may have another child, if her ninth husband has his way. Prince Frederic von Anhalt, who has power of attorney for his wife, allegedly wants to arrange for an egg donor, a surrogate mother and artificial insemination to allow it.
Ms. Gabor's only daughter, Francesca Hilton, alleges that the prince has been spending her mother's money unwisely.
Lesson: Choose the right person to have power of attorney for you.
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emerging markets: CIVETS and BRICS (wsj)
Monday, September 19, 2011
The Wall Street Journal Wealth Adviser
By JOHN GREENWOOD
Ten years after Brazil, Russia, India and China were dubbed the BRICs, any early mover advantage for investing in those economies has long gone.
.But lovers of acronyms will be relieved to learn the latest investment theme claiming to steal a march on emerging markets also has a catchy name: CIVETS.
The so-called CIVETS group of countries—Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa—are being touted as the next generation of tiger economies, even if they are named after a more shy and retiring feline mammal.
These nations all have large, young populations with an average age of 27. This, or so the theory goes, means these countries will benefit from fast-rising domestic consumption. They also are all fast-growing, relatively diverse economies, meaning they shouldn't be as heavily dependent on external demand as the BRICs.
HSBC Global Asset Management launched the first fund specifically targeting these countries, the HSBC GIF CIVETS fund, in May. HSBC points to rising levels of foreign direct investment across the grouping, low levels of public debt—except for Turkey—and sovereign credit ratings moving toward investment grade.
Critics say CIVETS countries have nothing in common beyond their youthful populations. Furthermore, they say, liquidity and corporate governance are patchy and political risk remains a factor, particularly in Egypt.
"This sounds like a gimmick to me," says Darius McDermott, managing director at Chelsea Financial Services. "What does Egypt have in common with Vietnam? At least the BRIC countries were the four biggest emerging economies, so there was some rationale for grouping them together. A general emerging-markets fund would be a less risky way to get similar exposure."
Still, early numbers suggest that CIVETS investors could prosper. The S&P CIVETS 60 index, established in 2007, is ahead of two other emerging-markets indexes—the S&P BRIC 40 and S&P Emerging BMI—over one and three years.
Colombia: Colombia is emerging as an attractive destination for investors. Improved security measures have led to a 90% decline in kidnappings and a 46% drop in the murder rate over the past decade, which has helped per-capita gross domestic product double since 2002. Colombia's sovereign debt was promoted to investment grade by all three ratings agencies this year.
Colombia has substantial oil, coal and natural-gas deposits. Foreign direct investment totaled $6.8 billion in 2010, with the U.S. its principal partner.
HSBC Global Asset Management likes Bancolombia SA, the country's largest private bank, which has posted a return on equity of more than 19% for each of the last eight years.
Indonesia: The world's fourth-most populous nation, Indonesia weathered the global financial crisis better than most, helped by its massive domestic consumption market. After growing 4.5% in 2009, it rebounded above the 6% mark last year and is predicted to stay there for the next few years. Its sovereign debt rating has risen to one notch below investment grade in the last year.
Although Indonesia has the lowest unit labor costs in the Asia-Pacific region and a government ambitious to make the nation a manufacturing hub, corruption is a problem.
Some fund managers see exposure best achieved through local subsidiaries of multinationals. Andy Brown, investment manager at Aberdeen Asset Management, holds PT Astra International, an auto conglomerate that is majority-owned by Jardine Matheson Group.
Vietnam: Vietnam has been one of the fastest-growing economies in the world for the past 20 years, with the World Bank projecting 6% growth this year rising to 7.2% in 2013. Its proximity to China has led some analysts to describe it as a potential new manufacturing hub.
But communist Vietnam only became a member of the World Trade Organization in 2007. "The reality is that investing in Vietnam is still a very laborious process," Mr. Brown says.
Cynics suggest Vietnam is included within the CIVETS to make the acronym work. The HSBC fund has only a 1.5% target allocation to the country.
Egypt: Revolution may have put the brakes on the Egyptian economy—the World Bank is predicting growth of just 1% this year, compared with 5.2% last year—but analysts expect it to regain its growth trajectory when political stability returns.
Egypt's many assets include fast-growing ports on the Mediterranean and Red Sea linked by the Suez Canal and its vast untapped natural-gas resources.
Egypt has a big, young population—82 million strong and with a median age of 25. Aberdeen says National Société Générale Bank (NSGB), a subsidiary of Société Générale SA, is well-positioned to take advantage of Egypt's underdeveloped domestic consumption.
Turkey: Located between Europe and major energy producers in the Middle East, Caspian Sea and Russia, Turkey has major natural-gas pipeline projects that make it an important energy corridor between Europe and Central Asia.
"Turkey is a dynamic economy that has trading links with the European Union but without the constraints of the euro-zone or EU membership," says Phil Poole of HSBC Global Asset Management.
The World Bank is predicting growth of 6.1% this year, falling back to 5.3% in 2013.
Mr. Poole rates national air carrier Türk Hava Yollari as a good investment, while Mr. Brown prefers fast-growing retailer BIM Birlesik Magazalar A.S. and Anadolu Group, which owns brewer Efes Beer Group.
South Africa: Rising commodity prices, renewed demand in its automotive and chemical industries and spending on the World Cup have helped South Africa—a diversified economy rich in resources such as gold and platinum—resume growth after it slipped into recession during the global economic downturn.
Many see the nation as a gateway to investment into the rest of Africa.
HSBC sees long-term growth potential in mining, energy and chemical firm Sasol Ltd.
Mr. Greenwood is a personal-finance writer in London. He can be reached at reports@wsj.com.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
The Wall Street Journal Wealth Adviser
By JOHN GREENWOOD
Ten years after Brazil, Russia, India and China were dubbed the BRICs, any early mover advantage for investing in those economies has long gone.
.But lovers of acronyms will be relieved to learn the latest investment theme claiming to steal a march on emerging markets also has a catchy name: CIVETS.
The so-called CIVETS group of countries—Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa—are being touted as the next generation of tiger economies, even if they are named after a more shy and retiring feline mammal.
These nations all have large, young populations with an average age of 27. This, or so the theory goes, means these countries will benefit from fast-rising domestic consumption. They also are all fast-growing, relatively diverse economies, meaning they shouldn't be as heavily dependent on external demand as the BRICs.
HSBC Global Asset Management launched the first fund specifically targeting these countries, the HSBC GIF CIVETS fund, in May. HSBC points to rising levels of foreign direct investment across the grouping, low levels of public debt—except for Turkey—and sovereign credit ratings moving toward investment grade.
Critics say CIVETS countries have nothing in common beyond their youthful populations. Furthermore, they say, liquidity and corporate governance are patchy and political risk remains a factor, particularly in Egypt.
"This sounds like a gimmick to me," says Darius McDermott, managing director at Chelsea Financial Services. "What does Egypt have in common with Vietnam? At least the BRIC countries were the four biggest emerging economies, so there was some rationale for grouping them together. A general emerging-markets fund would be a less risky way to get similar exposure."
Still, early numbers suggest that CIVETS investors could prosper. The S&P CIVETS 60 index, established in 2007, is ahead of two other emerging-markets indexes—the S&P BRIC 40 and S&P Emerging BMI—over one and three years.
Colombia: Colombia is emerging as an attractive destination for investors. Improved security measures have led to a 90% decline in kidnappings and a 46% drop in the murder rate over the past decade, which has helped per-capita gross domestic product double since 2002. Colombia's sovereign debt was promoted to investment grade by all three ratings agencies this year.
Colombia has substantial oil, coal and natural-gas deposits. Foreign direct investment totaled $6.8 billion in 2010, with the U.S. its principal partner.
HSBC Global Asset Management likes Bancolombia SA, the country's largest private bank, which has posted a return on equity of more than 19% for each of the last eight years.
Indonesia: The world's fourth-most populous nation, Indonesia weathered the global financial crisis better than most, helped by its massive domestic consumption market. After growing 4.5% in 2009, it rebounded above the 6% mark last year and is predicted to stay there for the next few years. Its sovereign debt rating has risen to one notch below investment grade in the last year.
Although Indonesia has the lowest unit labor costs in the Asia-Pacific region and a government ambitious to make the nation a manufacturing hub, corruption is a problem.
Some fund managers see exposure best achieved through local subsidiaries of multinationals. Andy Brown, investment manager at Aberdeen Asset Management, holds PT Astra International, an auto conglomerate that is majority-owned by Jardine Matheson Group.
Vietnam: Vietnam has been one of the fastest-growing economies in the world for the past 20 years, with the World Bank projecting 6% growth this year rising to 7.2% in 2013. Its proximity to China has led some analysts to describe it as a potential new manufacturing hub.
But communist Vietnam only became a member of the World Trade Organization in 2007. "The reality is that investing in Vietnam is still a very laborious process," Mr. Brown says.
Cynics suggest Vietnam is included within the CIVETS to make the acronym work. The HSBC fund has only a 1.5% target allocation to the country.
Egypt: Revolution may have put the brakes on the Egyptian economy—the World Bank is predicting growth of just 1% this year, compared with 5.2% last year—but analysts expect it to regain its growth trajectory when political stability returns.
Egypt's many assets include fast-growing ports on the Mediterranean and Red Sea linked by the Suez Canal and its vast untapped natural-gas resources.
Egypt has a big, young population—82 million strong and with a median age of 25. Aberdeen says National Société Générale Bank (NSGB), a subsidiary of Société Générale SA, is well-positioned to take advantage of Egypt's underdeveloped domestic consumption.
Turkey: Located between Europe and major energy producers in the Middle East, Caspian Sea and Russia, Turkey has major natural-gas pipeline projects that make it an important energy corridor between Europe and Central Asia.
"Turkey is a dynamic economy that has trading links with the European Union but without the constraints of the euro-zone or EU membership," says Phil Poole of HSBC Global Asset Management.
The World Bank is predicting growth of 6.1% this year, falling back to 5.3% in 2013.
Mr. Poole rates national air carrier Türk Hava Yollari as a good investment, while Mr. Brown prefers fast-growing retailer BIM Birlesik Magazalar A.S. and Anadolu Group, which owns brewer Efes Beer Group.
South Africa: Rising commodity prices, renewed demand in its automotive and chemical industries and spending on the World Cup have helped South Africa—a diversified economy rich in resources such as gold and platinum—resume growth after it slipped into recession during the global economic downturn.
Many see the nation as a gateway to investment into the rest of Africa.
HSBC sees long-term growth potential in mining, energy and chemical firm Sasol Ltd.
Mr. Greenwood is a personal-finance writer in London. He can be reached at reports@wsj.com.
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
Combat Inflation with Floating Rate Securities (Forbes)
Fixed-Income Watch
Inflation Protection For Free
Richard Lehmann, 09.12.11, 6:00 PM ET
I have been pounding the table warning about rising interest rates for some time now. Well, it hasn't happened yet, and the latest Fed pronouncement makes it clear that short- and long-term rates will likely stay low for the next two years. My fear of rising rates caused me to recommend adjustable-rate securities. I was wrong on inflation, but my floating-rate picks have done quite well.
Since 2009 the adjustable-rate securities have enjoyed a spectacular resurgence, because most of them were issued by banks and other financial institutions that suffered huge declines during the financial crisis. These "too big to fail" institutions needed capital, and they issued all kinds of paper to bolster their books.
While fixed-rate issues experienced a similar rise, they are hurt by their call provisions. Specifically, most of the issues with a 5% or higher coupon rate are likely to be refinanced. This means they're trading on a yield-to-call basis with measly returns measured in basis points rather than percentages (100 basis points equals one percentage point). Most are trading above the par value at which they will be redeemed. Those who bought fixed-rate capital note preferreds with high coupons, issued by the troubled banks in 2008, thought they would be safe from call until 2013. Not so.
Congress and the Dodd-Frank Act foiled this seemingly smart strategy. That act says these preferreds can no longer be considered part of a bank's tier-one capital. This triggers a "statutory change" loophole that now allows banks to call these fixed-rate preferreds early. Think of it as Chris Dodd's going away present to his banker buddies.
Adjustable-rate securities normally trade at lower yields than comparable fixed-rate securities. They pay interest monthly or quarterly based on a Treasury bond index, LIBOR or changes in the CPI. The floating rate means these notes are designed to trade at par. But this hasn't been happening. That is because these securities come with an interest rate floor, typically at about 4%. When these bonds were issued that was considered meager. Today a 4% yield is a king's ransom.
Despite the healthy yield floor, most of these adjustables are selling below par today because they are viewed as inflation hedges in a period when inflation fears are absent. Thus you can still buy these adjustable-rate securities below par value. That is like getting a dollar for 90 cents. Hence, inflation protection is free, and the call risk is a positive. Once inflation fears are rekindled and rates spike, you'll be all set with these floating-rate securities.
Here are some adjustables you should consider buying:
AEGON NV SERIES 1 (AEB, 17) PERPETUAL PREFERRED RATED BAA2/BBB/BBB. This Dutch multi-line insurance giant was hard-hit during the financial crisis and still suffers under the weight of European banking concerns. This preferred is adjustable quarterly based on three-month LIBOR plus 87.5 basis points. It has a 4% floor and no ceiling, so at its current price it yields 5.71%. Even better, it's eligible for the 15% qualified dividend income tax rate for those in the highest tax bracket.
Closer to home I like GOLDMAN SACHS SERIES A PERPETUAL PREFERRED (GS A, 19) RATED BAA2/BBB–/A–. It has a floor rate of 3.75% and no ceiling and is tied to three-month LIBOR plus 75 basis points. It yields 4.93%, and it also benefits from the preferable tax rate on dividend income.
If you are willing to accept more risk buy the SLM CORP. 0% OF 3/15/17 (OSM, 21) RATED BA1/BBB–, yielding 6.15%. SLM is better known as Sallie Mae, the student loan organization, which went private in 2004. This adjustable is different in that it pays monthly, based on the percentage change in the year-over-year Consumer Price Index, plus 200 basis points. It has no floor or ceiling rate and currently pays 5.164%. I like it because there is no delay in recognizing an uptick in inflation, but unfortunately it isn't eligible for lower tax treatment.
I thought rates would climb because the Fed would use inflation as its primary tool in curing our economic woes. Bernanke flooded our economy with dollars, but inflation failed to materialize. Our economy was much weaker than I thought. Dark clouds still hang over global markets. While inflation is not an immediate concern, it can and does crop up when it's least expected. Given the current international turmoil and clearly nervous markets, investments offering inflation protection at no cost are a gift I find hard to resist.
Inflation Protection For Free
Richard Lehmann, 09.12.11, 6:00 PM ET
I have been pounding the table warning about rising interest rates for some time now. Well, it hasn't happened yet, and the latest Fed pronouncement makes it clear that short- and long-term rates will likely stay low for the next two years. My fear of rising rates caused me to recommend adjustable-rate securities. I was wrong on inflation, but my floating-rate picks have done quite well.
Since 2009 the adjustable-rate securities have enjoyed a spectacular resurgence, because most of them were issued by banks and other financial institutions that suffered huge declines during the financial crisis. These "too big to fail" institutions needed capital, and they issued all kinds of paper to bolster their books.
While fixed-rate issues experienced a similar rise, they are hurt by their call provisions. Specifically, most of the issues with a 5% or higher coupon rate are likely to be refinanced. This means they're trading on a yield-to-call basis with measly returns measured in basis points rather than percentages (100 basis points equals one percentage point). Most are trading above the par value at which they will be redeemed. Those who bought fixed-rate capital note preferreds with high coupons, issued by the troubled banks in 2008, thought they would be safe from call until 2013. Not so.
Congress and the Dodd-Frank Act foiled this seemingly smart strategy. That act says these preferreds can no longer be considered part of a bank's tier-one capital. This triggers a "statutory change" loophole that now allows banks to call these fixed-rate preferreds early. Think of it as Chris Dodd's going away present to his banker buddies.
Adjustable-rate securities normally trade at lower yields than comparable fixed-rate securities. They pay interest monthly or quarterly based on a Treasury bond index, LIBOR or changes in the CPI. The floating rate means these notes are designed to trade at par. But this hasn't been happening. That is because these securities come with an interest rate floor, typically at about 4%. When these bonds were issued that was considered meager. Today a 4% yield is a king's ransom.
Despite the healthy yield floor, most of these adjustables are selling below par today because they are viewed as inflation hedges in a period when inflation fears are absent. Thus you can still buy these adjustable-rate securities below par value. That is like getting a dollar for 90 cents. Hence, inflation protection is free, and the call risk is a positive. Once inflation fears are rekindled and rates spike, you'll be all set with these floating-rate securities.
Here are some adjustables you should consider buying:
AEGON NV SERIES 1 (AEB, 17) PERPETUAL PREFERRED RATED BAA2/BBB/BBB. This Dutch multi-line insurance giant was hard-hit during the financial crisis and still suffers under the weight of European banking concerns. This preferred is adjustable quarterly based on three-month LIBOR plus 87.5 basis points. It has a 4% floor and no ceiling, so at its current price it yields 5.71%. Even better, it's eligible for the 15% qualified dividend income tax rate for those in the highest tax bracket.
Closer to home I like GOLDMAN SACHS SERIES A PERPETUAL PREFERRED (GS A, 19) RATED BAA2/BBB–/A–. It has a floor rate of 3.75% and no ceiling and is tied to three-month LIBOR plus 75 basis points. It yields 4.93%, and it also benefits from the preferable tax rate on dividend income.
If you are willing to accept more risk buy the SLM CORP. 0% OF 3/15/17 (OSM, 21) RATED BA1/BBB–, yielding 6.15%. SLM is better known as Sallie Mae, the student loan organization, which went private in 2004. This adjustable is different in that it pays monthly, based on the percentage change in the year-over-year Consumer Price Index, plus 200 basis points. It has no floor or ceiling rate and currently pays 5.164%. I like it because there is no delay in recognizing an uptick in inflation, but unfortunately it isn't eligible for lower tax treatment.
I thought rates would climb because the Fed would use inflation as its primary tool in curing our economic woes. Bernanke flooded our economy with dollars, but inflation failed to materialize. Our economy was much weaker than I thought. Dark clouds still hang over global markets. While inflation is not an immediate concern, it can and does crop up when it's least expected. Given the current international turmoil and clearly nervous markets, investments offering inflation protection at no cost are a gift I find hard to resist.
Potential for Countrywide Default (Bloomberg)
BofA Keeps Countrywide Bankruptcy as Option
By Hugh Son and Dawn Kopecki - Sep 16, 2011
Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy.
The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said.
The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years.
“If the losses become so great, how can Bank of America at least not discuss internally the relative tradeoff of a Countrywide bankruptcy?” Mayo, who has an “underperform” rating on the bank, said in an interview. “And if you pull out the bazooka, you’d better be prepared to use it.”
Countrywide Practices
Just before former CEO Kenneth D. Lewis bought Calabasas, California-based Countrywide, the firm was the biggest mortgage lender in the U.S. with 17 percent of the market and $408 billion of loans originated in 2007, according to industry newsletter Inside Mortgage Finance. Regulators later found its growth was fueled by lax lending standards, with loans marred by false or missing data about borrowers and properties.
Bankruptcy for Countrywide has gained credence with some investors and analysts after Bank of America lost almost half its market value this year. The shares have been whipsawed as the caseload of lawsuits by mortgage bond investors expanded, along with doubts about whether the bank has enough reserves to handle claims.
A Countrywide bankruptcy could halt legal proceedings and consolidate litigation into one court that would split up the subsidiary’s remaining assets for creditors, said Jay Westbrook, a law professor at the University of Texas at Austin. In effect, this would trade one type of litigation for another, one of the people said. The decision would turn on whether the potential savings of a filing outweigh the risks involved in disavowing some of the firm’s obligations, the person said.
What Could Go Wrong
Pitfalls include the possibility that a bankruptcy filing would cast doubt on the entire company’s willingness to support its other subsidiaries and damage Bank of America’s standing in the credit markets or with rating firms, hurting its ability to borrow, according to analysts.
“It’s not some sort of magic elixir that makes it all just go away,” Westbrook said. “I suspect that’s one reason they haven’t done it yet.”
Moynihan, 51, has been asked publicly about a potential Countrywide bankruptcy at least three times in the past year, most recently this week at a conference in New York. The bank’s mortgage division is his only unprofitable business, reporting a $25.3 billion pretax loss in the first half of this year.
Larry DiRita, a Bank of America spokesman, said he couldn’t comment on whether the company planned to file a Countrywide bankruptcy. The bank “took great pains to preserve the separate identity of Countrywide,” DiRita said.
Separate Accounting
Those steps include using separate accounting systems and profit-and-loss statements for Countrywide units, according to a report prepared for Bank of New York Mellon Corp. (BK), the trustee for a group of investors who agreed to an $8.5 billion settlement in June with Bank of America over faulty loans.
Bankruptcy “makes absolute good sense if they can do that,” said David Felt, a Washington-based consultant and former deputy general counsel at the Federal Housing Finance Agency. The FHFA sued Bank of America and 16 other banks this month to recover losses on about $200 billion in mortgage-backed securities sold to Fannie Mae and Freddie Mae, the government- backed mortgage firms. Bank of America and its subsidiaries created more than a quarter of those bonds.
“Given the size of these lawsuits, the potential liability could exceed the net worth of the subsidiary,” Felt said. “They could say the claims far exceed the amount that we have and therefore we need a bankruptcy court to pick and choose between those creditors.”
Assets Available
Countrywide has $11 billion in assets that could be depleted through demands to repurchase defective mortgages, Jonathan Glionna of Barclays Plc said in an Aug. 31 note. After that, Bank of America may not have any obligation to pay claims from Countrywide’s creditors, he said.
Typically, a corporation that acquires another firm’s assets isn’t liable for the seller’s debts, unless the transaction is considered a de facto merger or there was fraud in the takeover, Robert M. Daines, a Stanford Law School professor, wrote in a legal opinion prepared for BNY Mellon, trustee for the Countrywide mortgage bonds. Daines analyzed whether Bank of America would have to pay bond investors if Countrywide couldn’t.
American International Group Inc. (AIG), the insurer that sued Bank of America last month to recoup more than $10 billion in losses on Countrywide mortgage bonds, argued that the bank is a legal successor to the unit. New York-based AIG cited a series of transactions by Bank of America in 2008 that “were structured in such a way as to leave Countrywide unable to satisfy its massive contingent liabilities.”
Just in Case
Plaintiffs in the $8.5 billion settlement handled by BNY Mellon didn’t take any chances. Their agreement specified that Bank of America was responsible for making good on the payment because they were concerned that Countrywide might be thrown into bankruptcy, said Bob Madden, a Gibbs & Bruns LLP partner representing institutional investors that sued the bank.
“Bank of America didn’t do this stuff, it was Countrywide, which they had the misfortune of acquiring,” Madden said in an interview. “Anybody who tells you they have a solid handle on whether Bank of America can be forced to pay Countrywide liabilities hasn’t looked very closely at the issue.”
The chances of a bankruptcy filing rise “every time another suit gets put on the pile,” Madden said. Mark Herr, a spokesman for New York-based AIG and Stefanie Johnson of the FHFA declined to comment.
Bankruptcy’s Backlash
Bankruptcy would be a “last-ditch option,” and possibly a costly one, because counterparties might become hesitant to buy the parent company’s debt or open trading lines with its Merrill Lynch unit, David Hendler, a CreditSights Inc. analyst, said in a Sept. 8 note. Credit-rating firms could downgrade Bank of America subsidiaries, which benefit from the implicit support of their corporate parent, he said. That would drive up the bank’s cost of borrowing.
“Most counterparties I speak to think this would be a very difficult option for Bank of America and unlikely to be sanctioned by regulators,” said Manal Mehta, a partner at Branch Hill Capital, a San Francisco-based hedge fund that has bet against the lender’s stock in the past. “The whole reason they would pursue the nuclear option of a Countrywide bankruptcy would be to put this behind them, but all you would be doing is opening up a Pandora’s box.”
Outstanding Debt
Countrywide has $6.53 billion of debt outstanding, including $2.81 billion of senior unsecured notes, $2.2 billion of preferred securities and $529 million of mortgage-backed bonds, Bloomberg data and Bank of America figures show. The unit’s $1 billion in 6.25 percent notes have plunged 9.2 cents since Aug. 1 to 97.1 cents on the dollar as of Sept. 13, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
Management’s public stance on a potential Countrywide bankruptcy has evolved. In November, responding to a question from Mayo -- who had written a report that month entitled “Is a Countrywide Bankruptcy Possible?” -- Moynihan said he didn’t “see any liability that would make us think differently about working through it in the way we’re working.”
Since then, damage from Countrywide has steadily mounted as U.S.-owned Fannie Mae and Freddie Mac step up demands that the bank repurchase soured loans and new suits emerge, including from AIG and the FHFA. Further, New York Attorney General Eric Schneiderman is seeking to scuttle the $8.5 billion deal, which may result in greater mortgage costs, Bank of America has said.
Last month, when Moynihan was asked during a conference call held by fund manager and bank shareholder Bruce Berkowitz if a Chapter 11 restructuring would be a “viable solution” for Countrywide, the CEO declined to say what he’d do.
“When you face liabilities like this, we thought of every possible thing we could,” Moynihan said, “but I don’t think I’d comment on any outcome.”
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net
To contact the editor responsible for this story: Rick Green in New York at rgreen18@bloomberg.net.
.®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
By Hugh Son and Dawn Kopecki - Sep 16, 2011
Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy.
The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said.
The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years.
“If the losses become so great, how can Bank of America at least not discuss internally the relative tradeoff of a Countrywide bankruptcy?” Mayo, who has an “underperform” rating on the bank, said in an interview. “And if you pull out the bazooka, you’d better be prepared to use it.”
Countrywide Practices
Just before former CEO Kenneth D. Lewis bought Calabasas, California-based Countrywide, the firm was the biggest mortgage lender in the U.S. with 17 percent of the market and $408 billion of loans originated in 2007, according to industry newsletter Inside Mortgage Finance. Regulators later found its growth was fueled by lax lending standards, with loans marred by false or missing data about borrowers and properties.
Bankruptcy for Countrywide has gained credence with some investors and analysts after Bank of America lost almost half its market value this year. The shares have been whipsawed as the caseload of lawsuits by mortgage bond investors expanded, along with doubts about whether the bank has enough reserves to handle claims.
A Countrywide bankruptcy could halt legal proceedings and consolidate litigation into one court that would split up the subsidiary’s remaining assets for creditors, said Jay Westbrook, a law professor at the University of Texas at Austin. In effect, this would trade one type of litigation for another, one of the people said. The decision would turn on whether the potential savings of a filing outweigh the risks involved in disavowing some of the firm’s obligations, the person said.
What Could Go Wrong
Pitfalls include the possibility that a bankruptcy filing would cast doubt on the entire company’s willingness to support its other subsidiaries and damage Bank of America’s standing in the credit markets or with rating firms, hurting its ability to borrow, according to analysts.
“It’s not some sort of magic elixir that makes it all just go away,” Westbrook said. “I suspect that’s one reason they haven’t done it yet.”
Moynihan, 51, has been asked publicly about a potential Countrywide bankruptcy at least three times in the past year, most recently this week at a conference in New York. The bank’s mortgage division is his only unprofitable business, reporting a $25.3 billion pretax loss in the first half of this year.
Larry DiRita, a Bank of America spokesman, said he couldn’t comment on whether the company planned to file a Countrywide bankruptcy. The bank “took great pains to preserve the separate identity of Countrywide,” DiRita said.
Separate Accounting
Those steps include using separate accounting systems and profit-and-loss statements for Countrywide units, according to a report prepared for Bank of New York Mellon Corp. (BK), the trustee for a group of investors who agreed to an $8.5 billion settlement in June with Bank of America over faulty loans.
Bankruptcy “makes absolute good sense if they can do that,” said David Felt, a Washington-based consultant and former deputy general counsel at the Federal Housing Finance Agency. The FHFA sued Bank of America and 16 other banks this month to recover losses on about $200 billion in mortgage-backed securities sold to Fannie Mae and Freddie Mae, the government- backed mortgage firms. Bank of America and its subsidiaries created more than a quarter of those bonds.
“Given the size of these lawsuits, the potential liability could exceed the net worth of the subsidiary,” Felt said. “They could say the claims far exceed the amount that we have and therefore we need a bankruptcy court to pick and choose between those creditors.”
Assets Available
Countrywide has $11 billion in assets that could be depleted through demands to repurchase defective mortgages, Jonathan Glionna of Barclays Plc said in an Aug. 31 note. After that, Bank of America may not have any obligation to pay claims from Countrywide’s creditors, he said.
Typically, a corporation that acquires another firm’s assets isn’t liable for the seller’s debts, unless the transaction is considered a de facto merger or there was fraud in the takeover, Robert M. Daines, a Stanford Law School professor, wrote in a legal opinion prepared for BNY Mellon, trustee for the Countrywide mortgage bonds. Daines analyzed whether Bank of America would have to pay bond investors if Countrywide couldn’t.
American International Group Inc. (AIG), the insurer that sued Bank of America last month to recoup more than $10 billion in losses on Countrywide mortgage bonds, argued that the bank is a legal successor to the unit. New York-based AIG cited a series of transactions by Bank of America in 2008 that “were structured in such a way as to leave Countrywide unable to satisfy its massive contingent liabilities.”
Just in Case
Plaintiffs in the $8.5 billion settlement handled by BNY Mellon didn’t take any chances. Their agreement specified that Bank of America was responsible for making good on the payment because they were concerned that Countrywide might be thrown into bankruptcy, said Bob Madden, a Gibbs & Bruns LLP partner representing institutional investors that sued the bank.
“Bank of America didn’t do this stuff, it was Countrywide, which they had the misfortune of acquiring,” Madden said in an interview. “Anybody who tells you they have a solid handle on whether Bank of America can be forced to pay Countrywide liabilities hasn’t looked very closely at the issue.”
The chances of a bankruptcy filing rise “every time another suit gets put on the pile,” Madden said. Mark Herr, a spokesman for New York-based AIG and Stefanie Johnson of the FHFA declined to comment.
Bankruptcy’s Backlash
Bankruptcy would be a “last-ditch option,” and possibly a costly one, because counterparties might become hesitant to buy the parent company’s debt or open trading lines with its Merrill Lynch unit, David Hendler, a CreditSights Inc. analyst, said in a Sept. 8 note. Credit-rating firms could downgrade Bank of America subsidiaries, which benefit from the implicit support of their corporate parent, he said. That would drive up the bank’s cost of borrowing.
“Most counterparties I speak to think this would be a very difficult option for Bank of America and unlikely to be sanctioned by regulators,” said Manal Mehta, a partner at Branch Hill Capital, a San Francisco-based hedge fund that has bet against the lender’s stock in the past. “The whole reason they would pursue the nuclear option of a Countrywide bankruptcy would be to put this behind them, but all you would be doing is opening up a Pandora’s box.”
Outstanding Debt
Countrywide has $6.53 billion of debt outstanding, including $2.81 billion of senior unsecured notes, $2.2 billion of preferred securities and $529 million of mortgage-backed bonds, Bloomberg data and Bank of America figures show. The unit’s $1 billion in 6.25 percent notes have plunged 9.2 cents since Aug. 1 to 97.1 cents on the dollar as of Sept. 13, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
Management’s public stance on a potential Countrywide bankruptcy has evolved. In November, responding to a question from Mayo -- who had written a report that month entitled “Is a Countrywide Bankruptcy Possible?” -- Moynihan said he didn’t “see any liability that would make us think differently about working through it in the way we’re working.”
Since then, damage from Countrywide has steadily mounted as U.S.-owned Fannie Mae and Freddie Mac step up demands that the bank repurchase soured loans and new suits emerge, including from AIG and the FHFA. Further, New York Attorney General Eric Schneiderman is seeking to scuttle the $8.5 billion deal, which may result in greater mortgage costs, Bank of America has said.
Last month, when Moynihan was asked during a conference call held by fund manager and bank shareholder Bruce Berkowitz if a Chapter 11 restructuring would be a “viable solution” for Countrywide, the CEO declined to say what he’d do.
“When you face liabilities like this, we thought of every possible thing we could,” Moynihan said, “but I don’t think I’d comment on any outcome.”
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net
To contact the editor responsible for this story: Rick Green in New York at rgreen18@bloomberg.net.
.®2011 BLOOMBERG L.P. ALL RIGHTS RESERVED.
Top 10 Investment Scams (NASAA.org)
August 23, 2011
Con Artists Find Profit in Get-Rich Schemes Tied to Economic Uncertainty
NASAA Identifies Investor Threats Among Financial Products and Practices
WASHINGTON (August 23, 2011) – The North American Securities Administrators Association (NASAA) today released its annual list of financial products and practices that threaten to trap unwary investors, many by taking advantage of investors troubled by lingering economic uncertainty and volatile stock markets.
“Con artists follow the news and seek ways to exploit the headlines to their advantage while leaving investors holding an empty bag,” said David Massey, NASAA President and North Carolina Deputy Securities Administrator.
Massey said headline-related investor complaints reaching state and provincial securities regulators include questionable claims, such as: “Realize safety and appreciation in gold;” “Wave energy: the future to power our homes;” “Synthetic fuels take the oilman out of our pockets;” and “Invest in foreclosed homes, help others and make a fortune!”
“Promoters often offer investors an opportunity to get in on the ‘ground floor’ of new technology or ideas to help others and make a great economic return,” Massey said. “Unsuspecting investors can be lured into these schemes, especially if they sound familiar. These offerings require careful research and a strong reminder that if it sounds too good to be true, it probably is not true, nor will it be profitable to anyone but the promoter.”
The following alphabetical listing of the Top 10 financial products and practices that threaten to trap unwary investors was compiled by the securities regulators in NASAA’s Enforcement Section.
PRODUCTS: distressed real estate schemes, energy investments, gold and precious metal investments, promissory notes, and securitized life settlement contracts.
PRACTICES: affinity fraud, bogus or exaggerated credentials, mirror trading, private placements, and securities and investment advice offered by unlicensed agents.
Massey urged investors to learn the warning signs of investment fraud and independently verify any investment opportunity as well as the background of the person and company offering the investment. State and provincial securities regulators provide detailed background information about those who sell securities or give investment advice, as well as about the products being offered.
“Investors should do business only with licensed brokers and investment advisers and should report any suspicion of investment fraud to their state or provincial securities regulator,” Massey said.
NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.
2011 NASAA Top Investor Traps and Threats
Products
Distressed Real Estate Schemes. Investment offerings involving distressed real estate have been on the rise following the collapse of the real estate bubble. While many legitimate investment offerings are tied to real estate, investment pools targeting distressed real estate have become increasingly popular with con artists as well as investors. Investments in properties that are bank-owned, in foreclosure, pending short sales or otherwise in distress inevitably carry substantial risks and should be evaluated carefully. Just like other securities, interests in real estate ventures also must be registered with state securities regulators.
In February 2011, a Florida man pleaded guilty to conspiracy to commit mail and wire fraud in a scheme that solicited $2.3 million from 39 investors nationwide to purchase and refurbish distressed properties and, in turn, sell them for a profit. Investors were issued corporate promissory notes with returns of up to 12 percent. Investigators determined that the investments were used for personal gain and to make Ponzi-type distributions to other investors.
Energy Investments. Swindlers continue to attempt to trick investors by using high-pressure marketing tactics touting the mystique associated with untapped oil and gas reserves and bountiful production runs. Even genuine oil and gas investments almost always bear a high degree of risk. Investors must realize the distinct possibility that they could lose their total investment in legitimate ventures. Energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich.
Colorado securities regulators issued a cease and desist order earlier this year against a Texas oil and gas company for allegedly violating state securities registration and licensing provisions. The case came to light after a company sales agents unwittingly “cold called” an employee of the Colorado Division of Securities and offered a joint venture interest in two Pennsylvania oil wells with next to no drilling risk.
Gold and Precious Metals. Higher precious metal prices and the promise of an ever-appreciating, “tangible” asset have lured unsuspecting investors into a variety of scams. Many recent schemes are variations on old themes: a promoter seeking capital for extraction equipment to reopen a long dormant mine in exchange for a full refund plus interest and a stake in the mine. In another case, operators claimed to have special coins or nuggets that they can store or trade for investors in special markets for high profits and returns. Investors suffered heavy losses in each of these cases. And despite ubiquitous promises to the contrary, there are no guarantees with gold or precious metals, even in legitimate markets. In the spring of 2011, silver’s value declined by 30 percent in a single three-week period.
In 2011, the founder of Florida-based Gold Bullion Exchange pleaded guilty to fraud charges in a scheme that collapsed on more than 1,400 investors who lost $29.5 million. Investors were solicited through a sophisticated telemarketing operation to purchase precious metal bullion using purported “leverage” financing. Investors were led to believe that they would need only to provide a fraction of the total cost of the purchased metals, with the remainder of the purchase price to be covered by margin-type financing, which would purportedly be extended to the investor by a “clearing firm.” State and federal investigators found that the clearing firm delayed or ignored requests by investors to sell their precious metals investments. Despite having paid commissions and fees of up to 18 percent for their precious metals investments, investigators determined that no bullion was purchased.
Promissory Notes. Investors seeking safety in uncertain economic conditions or those enticed by the promise of big returns through a private, informal loan arrangement may suffer deep losses investing in unregistered or fraudulent promissory notes. These notes give investors a false sense of security with promises or guarantees of fixed interest rates and safety of principal. However, even legitimate notes carry some risk that the issuers may not be able to meet their obligations. Often initially pitched as personal loans or short-term business arrangements, most promissory notes and the persons who sell them must be registered with state securities regulators. Unregistered promissory notes are often covers for Ponzi schemes and other scams. Investors should check with their state regulator to determine whether a promissory note and the seller/borrower are properly registered.
A former FBI agent was convicted in Alabama this year after an investigation by Alabama securities regulators revealed that he used promissory notes guaranteeing returns as high as 12 percent to lure investors into a Ponzi scheme. The funds were to be invested in real estate and medical technology ventures, but investigators determined that the former agent used most of the funds, more than $4 million, to pay Ponzi-style returns to previous investors and for his personal use.
Securitized Life Settlement Contracts. Life settlement contracts are investments in the death benefits of insurance policies that insure the lives of unrelated third parties. Legitimate investments in life settlement contracts involve a high degree of risk, and investors may be responsible for routinely paying costly premiums for policies that insure people who outlive their life expectancies. Outside the legitimate offerings, crooks are embracing new schemes to deceive even cautious investors. For example, “securitized” life settlement contracts are increasingly popular investments that combine life settlement contracts with traditional securities, such as bonds that supposedly guarantee a fixed return on a fixed date, regardless of whether the insured outlive their life expectancies. This risk-reducing structure has too often proven fraudulent and left victims with nothing but worthless paper issued by a bonding company that does not maintain sufficient assets to fulfill the guarantee, operates in an unregulated overseas territory or simply does not exist.
In 2011, two executives of National Life Settlements LLC of Houston were indicted on charges of securities fraud and the sale of unregistered securities after an undercover investigation by Texas securities regulators determined the pair had sold $30 million in unregistered promissory notes secured by life settlement contracts. One of the executives was a three-time convicted felon with a long history of investment fraud. The promise of a safe investment with annual returns as high as 10 percent served as bait to lure investors into what a court-appointed receiver testified was a Ponzi scheme. The company sold these unregistered investments largely to retired teachers and state employees through a network of financial professions, including insurance agents and securities brokers. The criminal indictment alleges that investors' money was spent on commissions and personal expenses, including the purchase of houses and cars.
Practices
Affinity Fraud. Marketing a fraudulent investment scheme to members of an identifiable group or organization continues to be a highly successful and lucrative practice for Ponzi scheme operators and other fraudsters. A recent national study of Ponzi schemes over the past decade found that one in four were marketed to affinity groups to increase the scheme's credibility and build the fraud. The most commonly exploited are the elderly or retired, religious groups, and ethnic groups. Investment decisions should always be made based on careful evaluation of the underlying merits rather than common affiliations with the promoter.
A 73-year-old North Carolina man pleaded guilty this year to 19 felony counts of securities fraud following an investigation by North Carolina securities regulators that determined he had collected more than $18.5 million from more than 100 investors, many of whom he knew from church or other social circles. The investments for venture capital investments in various unspecified companies came with a promissory note guaranteeing annual returns of between 10 and 50 percent. Bank records revealed a Ponzi scheme using money from new investors to pay returns to previous investors.
Bogus or Exaggerated Credentials. State securities regulators have led the effort to prevent the misuse of credentials or designations intended to imply special expertise or training in advising senior citizens on financial matters. Since 2008, 29 states have adopted laws or rules preventing such misuse. Now, state regulators are noting an increase in the use of other bogus credentials or exaggerated designations. State securities regulators have encountered salesmen pitching financial services or products with nonexistent law degrees or CPA certificates and expired or nonexistent CRD numbers. Others have boasted of impressive sounding designations that prove to be meaningless. In every circumstance, investors should press for full disclosure and the meaning behind all designations, and should check with their state regulator if they have any suspicions about claimed credentials.
Securities regulators in Utah came across a broker who listed “C.H.S.G.” after his name on his business card. When asked, the broker told regulators the initials stood for “Certified High School Graduate.”
Mirror Trading. The securities market is constantly evolving to provide investors with new products, different platforms and a variety of choices. The latest evolution is “mirror trading,” which is promoted as an automated trading platform that ensures investors will participate in real-time transactions placed or executed by a skilled and knowledgeable third party. Whenever the third party executes a trade in his or her account, the same trade is mechanically placed on behalf of the investor in the investor’s account. Investors should not be lulled into a false sense of security, and they need to continue to objectively evaluate and carefully consider all new or popular investment platforms. They should also recognize that unscrupulous traders and promoters may use trendy platforms such as mirror trading as a way to launch fraudulent schemes or manipulate markets by lying about their qualifications, misrepresenting the success of their strategies, or concealing their motivations and conflicts of interest.
Private Placements. Investors should be aware that, even in the case of legitimate issuers, private placement offerings are highly illiquid, generally lack transparency and have little regulatory oversight. In the United States, the federal exemption for private placement offerings provided under Rule 506 of Regulation D continues to be abused by criminals. Although properly used by many legitimate issuers, unscrupulous promoters use Rule 506 to cloak an otherwise fraudulent offering in legitimacy.
In 2011, U.S. and Canadian authorities convicted three individuals of criminal fraud charges related to the sale of $33 million in oil and gas private placement offerings. The defendants claimed the securities were exempt from registration under Rule 506. In an attempt to avoid regulatory scrutiny, the defendants organized their company in the Bahamas and sold the securities from a boiler room located in Ontario, Canada, while telling investors the company was located in Kentucky. Securities regulators also have taken civil fraud actions against private placement issuers, Medical Capital Holdings, Inc. and Provident Royalties, which raised more than $500 million from investors though private offerings sold by dozens of broker-dealers. The companies are alleged to have defrauded investors by misrepresenting the use of the investment proceeds and misappropriating millions in investor funds.
Securities and Investment Advice Offered by Unlicensed Agents. State securities regulators have identified a consistent increase in investor complaints regarding salesmen unlicensed as securities brokers or investment advisers giving investment advice or effecting securities transactions. For example, insurance agents offering securities or investment advice without a securities license have not demonstrated sufficient expertise to legally recommend that an investor liquidate securities holdings in favor of insurance products. Investors are often unaware that their insurance agent may not be licensed to give investment advice, and these recommendations too often turn out to be unsuitable or result in investors placed in under-performing products or those with hidden fees or long lock-up periods. Investors should insist that any time anyone recommends or suggests any transaction related to an investor’s stocks, bonds, mutual funds or other securities holdings, the person must produce a proper license.
In 2011, an insurance agent unlicensed to sell securities and his manager were barred from working in the Missouri securities industry for five years after Missouri securities regulators uncovered a complex scheme that saw the liquidation of more than $7 million in securities investments from 180 customer accounts. Agents had moved most of these funds into proprietary fixed or equity indexed annuities.
For more information:
Bob Webster, Director of Communication
202-737-0900
Con Artists Find Profit in Get-Rich Schemes Tied to Economic Uncertainty
NASAA Identifies Investor Threats Among Financial Products and Practices
WASHINGTON (August 23, 2011) – The North American Securities Administrators Association (NASAA) today released its annual list of financial products and practices that threaten to trap unwary investors, many by taking advantage of investors troubled by lingering economic uncertainty and volatile stock markets.
“Con artists follow the news and seek ways to exploit the headlines to their advantage while leaving investors holding an empty bag,” said David Massey, NASAA President and North Carolina Deputy Securities Administrator.
Massey said headline-related investor complaints reaching state and provincial securities regulators include questionable claims, such as: “Realize safety and appreciation in gold;” “Wave energy: the future to power our homes;” “Synthetic fuels take the oilman out of our pockets;” and “Invest in foreclosed homes, help others and make a fortune!”
“Promoters often offer investors an opportunity to get in on the ‘ground floor’ of new technology or ideas to help others and make a great economic return,” Massey said. “Unsuspecting investors can be lured into these schemes, especially if they sound familiar. These offerings require careful research and a strong reminder that if it sounds too good to be true, it probably is not true, nor will it be profitable to anyone but the promoter.”
The following alphabetical listing of the Top 10 financial products and practices that threaten to trap unwary investors was compiled by the securities regulators in NASAA’s Enforcement Section.
PRODUCTS: distressed real estate schemes, energy investments, gold and precious metal investments, promissory notes, and securitized life settlement contracts.
PRACTICES: affinity fraud, bogus or exaggerated credentials, mirror trading, private placements, and securities and investment advice offered by unlicensed agents.
Massey urged investors to learn the warning signs of investment fraud and independently verify any investment opportunity as well as the background of the person and company offering the investment. State and provincial securities regulators provide detailed background information about those who sell securities or give investment advice, as well as about the products being offered.
“Investors should do business only with licensed brokers and investment advisers and should report any suspicion of investment fraud to their state or provincial securities regulator,” Massey said.
NASAA is the oldest international organization devoted to investor protection. Its membership consists of the securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.
2011 NASAA Top Investor Traps and Threats
Products
Distressed Real Estate Schemes. Investment offerings involving distressed real estate have been on the rise following the collapse of the real estate bubble. While many legitimate investment offerings are tied to real estate, investment pools targeting distressed real estate have become increasingly popular with con artists as well as investors. Investments in properties that are bank-owned, in foreclosure, pending short sales or otherwise in distress inevitably carry substantial risks and should be evaluated carefully. Just like other securities, interests in real estate ventures also must be registered with state securities regulators.
In February 2011, a Florida man pleaded guilty to conspiracy to commit mail and wire fraud in a scheme that solicited $2.3 million from 39 investors nationwide to purchase and refurbish distressed properties and, in turn, sell them for a profit. Investors were issued corporate promissory notes with returns of up to 12 percent. Investigators determined that the investments were used for personal gain and to make Ponzi-type distributions to other investors.
Energy Investments. Swindlers continue to attempt to trick investors by using high-pressure marketing tactics touting the mystique associated with untapped oil and gas reserves and bountiful production runs. Even genuine oil and gas investments almost always bear a high degree of risk. Investors must realize the distinct possibility that they could lose their total investment in legitimate ventures. Energy investments tend to be poor alternatives for those planning for retirement and should be avoided by anyone who cannot afford to strike out when trying to strike it rich.
Colorado securities regulators issued a cease and desist order earlier this year against a Texas oil and gas company for allegedly violating state securities registration and licensing provisions. The case came to light after a company sales agents unwittingly “cold called” an employee of the Colorado Division of Securities and offered a joint venture interest in two Pennsylvania oil wells with next to no drilling risk.
Gold and Precious Metals. Higher precious metal prices and the promise of an ever-appreciating, “tangible” asset have lured unsuspecting investors into a variety of scams. Many recent schemes are variations on old themes: a promoter seeking capital for extraction equipment to reopen a long dormant mine in exchange for a full refund plus interest and a stake in the mine. In another case, operators claimed to have special coins or nuggets that they can store or trade for investors in special markets for high profits and returns. Investors suffered heavy losses in each of these cases. And despite ubiquitous promises to the contrary, there are no guarantees with gold or precious metals, even in legitimate markets. In the spring of 2011, silver’s value declined by 30 percent in a single three-week period.
In 2011, the founder of Florida-based Gold Bullion Exchange pleaded guilty to fraud charges in a scheme that collapsed on more than 1,400 investors who lost $29.5 million. Investors were solicited through a sophisticated telemarketing operation to purchase precious metal bullion using purported “leverage” financing. Investors were led to believe that they would need only to provide a fraction of the total cost of the purchased metals, with the remainder of the purchase price to be covered by margin-type financing, which would purportedly be extended to the investor by a “clearing firm.” State and federal investigators found that the clearing firm delayed or ignored requests by investors to sell their precious metals investments. Despite having paid commissions and fees of up to 18 percent for their precious metals investments, investigators determined that no bullion was purchased.
Promissory Notes. Investors seeking safety in uncertain economic conditions or those enticed by the promise of big returns through a private, informal loan arrangement may suffer deep losses investing in unregistered or fraudulent promissory notes. These notes give investors a false sense of security with promises or guarantees of fixed interest rates and safety of principal. However, even legitimate notes carry some risk that the issuers may not be able to meet their obligations. Often initially pitched as personal loans or short-term business arrangements, most promissory notes and the persons who sell them must be registered with state securities regulators. Unregistered promissory notes are often covers for Ponzi schemes and other scams. Investors should check with their state regulator to determine whether a promissory note and the seller/borrower are properly registered.
A former FBI agent was convicted in Alabama this year after an investigation by Alabama securities regulators revealed that he used promissory notes guaranteeing returns as high as 12 percent to lure investors into a Ponzi scheme. The funds were to be invested in real estate and medical technology ventures, but investigators determined that the former agent used most of the funds, more than $4 million, to pay Ponzi-style returns to previous investors and for his personal use.
Securitized Life Settlement Contracts. Life settlement contracts are investments in the death benefits of insurance policies that insure the lives of unrelated third parties. Legitimate investments in life settlement contracts involve a high degree of risk, and investors may be responsible for routinely paying costly premiums for policies that insure people who outlive their life expectancies. Outside the legitimate offerings, crooks are embracing new schemes to deceive even cautious investors. For example, “securitized” life settlement contracts are increasingly popular investments that combine life settlement contracts with traditional securities, such as bonds that supposedly guarantee a fixed return on a fixed date, regardless of whether the insured outlive their life expectancies. This risk-reducing structure has too often proven fraudulent and left victims with nothing but worthless paper issued by a bonding company that does not maintain sufficient assets to fulfill the guarantee, operates in an unregulated overseas territory or simply does not exist.
In 2011, two executives of National Life Settlements LLC of Houston were indicted on charges of securities fraud and the sale of unregistered securities after an undercover investigation by Texas securities regulators determined the pair had sold $30 million in unregistered promissory notes secured by life settlement contracts. One of the executives was a three-time convicted felon with a long history of investment fraud. The promise of a safe investment with annual returns as high as 10 percent served as bait to lure investors into what a court-appointed receiver testified was a Ponzi scheme. The company sold these unregistered investments largely to retired teachers and state employees through a network of financial professions, including insurance agents and securities brokers. The criminal indictment alleges that investors' money was spent on commissions and personal expenses, including the purchase of houses and cars.
Practices
Affinity Fraud. Marketing a fraudulent investment scheme to members of an identifiable group or organization continues to be a highly successful and lucrative practice for Ponzi scheme operators and other fraudsters. A recent national study of Ponzi schemes over the past decade found that one in four were marketed to affinity groups to increase the scheme's credibility and build the fraud. The most commonly exploited are the elderly or retired, religious groups, and ethnic groups. Investment decisions should always be made based on careful evaluation of the underlying merits rather than common affiliations with the promoter.
A 73-year-old North Carolina man pleaded guilty this year to 19 felony counts of securities fraud following an investigation by North Carolina securities regulators that determined he had collected more than $18.5 million from more than 100 investors, many of whom he knew from church or other social circles. The investments for venture capital investments in various unspecified companies came with a promissory note guaranteeing annual returns of between 10 and 50 percent. Bank records revealed a Ponzi scheme using money from new investors to pay returns to previous investors.
Bogus or Exaggerated Credentials. State securities regulators have led the effort to prevent the misuse of credentials or designations intended to imply special expertise or training in advising senior citizens on financial matters. Since 2008, 29 states have adopted laws or rules preventing such misuse. Now, state regulators are noting an increase in the use of other bogus credentials or exaggerated designations. State securities regulators have encountered salesmen pitching financial services or products with nonexistent law degrees or CPA certificates and expired or nonexistent CRD numbers. Others have boasted of impressive sounding designations that prove to be meaningless. In every circumstance, investors should press for full disclosure and the meaning behind all designations, and should check with their state regulator if they have any suspicions about claimed credentials.
Securities regulators in Utah came across a broker who listed “C.H.S.G.” after his name on his business card. When asked, the broker told regulators the initials stood for “Certified High School Graduate.”
Mirror Trading. The securities market is constantly evolving to provide investors with new products, different platforms and a variety of choices. The latest evolution is “mirror trading,” which is promoted as an automated trading platform that ensures investors will participate in real-time transactions placed or executed by a skilled and knowledgeable third party. Whenever the third party executes a trade in his or her account, the same trade is mechanically placed on behalf of the investor in the investor’s account. Investors should not be lulled into a false sense of security, and they need to continue to objectively evaluate and carefully consider all new or popular investment platforms. They should also recognize that unscrupulous traders and promoters may use trendy platforms such as mirror trading as a way to launch fraudulent schemes or manipulate markets by lying about their qualifications, misrepresenting the success of their strategies, or concealing their motivations and conflicts of interest.
Private Placements. Investors should be aware that, even in the case of legitimate issuers, private placement offerings are highly illiquid, generally lack transparency and have little regulatory oversight. In the United States, the federal exemption for private placement offerings provided under Rule 506 of Regulation D continues to be abused by criminals. Although properly used by many legitimate issuers, unscrupulous promoters use Rule 506 to cloak an otherwise fraudulent offering in legitimacy.
In 2011, U.S. and Canadian authorities convicted three individuals of criminal fraud charges related to the sale of $33 million in oil and gas private placement offerings. The defendants claimed the securities were exempt from registration under Rule 506. In an attempt to avoid regulatory scrutiny, the defendants organized their company in the Bahamas and sold the securities from a boiler room located in Ontario, Canada, while telling investors the company was located in Kentucky. Securities regulators also have taken civil fraud actions against private placement issuers, Medical Capital Holdings, Inc. and Provident Royalties, which raised more than $500 million from investors though private offerings sold by dozens of broker-dealers. The companies are alleged to have defrauded investors by misrepresenting the use of the investment proceeds and misappropriating millions in investor funds.
Securities and Investment Advice Offered by Unlicensed Agents. State securities regulators have identified a consistent increase in investor complaints regarding salesmen unlicensed as securities brokers or investment advisers giving investment advice or effecting securities transactions. For example, insurance agents offering securities or investment advice without a securities license have not demonstrated sufficient expertise to legally recommend that an investor liquidate securities holdings in favor of insurance products. Investors are often unaware that their insurance agent may not be licensed to give investment advice, and these recommendations too often turn out to be unsuitable or result in investors placed in under-performing products or those with hidden fees or long lock-up periods. Investors should insist that any time anyone recommends or suggests any transaction related to an investor’s stocks, bonds, mutual funds or other securities holdings, the person must produce a proper license.
In 2011, an insurance agent unlicensed to sell securities and his manager were barred from working in the Missouri securities industry for five years after Missouri securities regulators uncovered a complex scheme that saw the liquidation of more than $7 million in securities investments from 180 customer accounts. Agents had moved most of these funds into proprietary fixed or equity indexed annuities.
For more information:
Bob Webster, Director of Communication
202-737-0900
The GAO Report on Immediate Annuities
The Government Accountability Office endorses immediate annuities as a supplement to social security.
Report to the Chairman, Special
Committee on Aging, U.S. Senate
June 2011
RETIREMENT
INCOME
Ensuring Income
throughout
Retirement GAO-11-400
http://www.gao.gov/new.items/d11400.pdf
Report to the Chairman, Special
Committee on Aging, U.S. Senate
June 2011
RETIREMENT
INCOME
Ensuring Income
throughout
Retirement GAO-11-400
http://www.gao.gov/new.items/d11400.pdf
The Best and the Worst States for Muni Bonds (Barrons)
Barron's Cover | MONDAY, AUGUST 29, 2011
Good, Bad and Ugly
By JONATHAN R. LAING There's hope for states that accept structural change, but pain for those that won't. Are you listening, Illinois and California?
For most states, fiscal 2012 is shaping up as a brutal year. They've already had to close a collective gap of more than $100 billion between their projected revenues and previously budgeted expenses, mostly due to anemic sales taxes and personal and corporate-income levies. And all this comes after three years of large budget shortfalls, during which most of the low-hanging fruit in expenses had been plucked and rainy-day funds and other reserves had been plundered.
Likewise, just about all of the $165 billion in federal stimulus money that had helped to close state budget gaps since the 2008-09 financial crisis has been spent. Thus, the cuts for fiscal 2012, which for most states began last month, promise to be particularly painful, leading to employee layoffs and reduced human-services spending on programs such as Medicaid.
Education will bear the brunt, as states are forced to trim their funding to public universities and K-through-12 school districts. The latter, particularly in low-income areas, will especially suffer from the lagged effect of the housing bust on a falling property-tax take.
Yet there's hope amid the gloom for many of the states, and for the $1.5 trillion state municipal-bond market. Tax revenue has begun to rise again, after falling cataclysmically for five straight quarters during the Great Recession.
In fact, state-tax revenue in fiscal 2011's first quarter was up 9.3%, on average, over the year-earlier figure, reports the respected Nelson A. Rockefeller Institute of Government at the State University of New York at Albany. This was the fifth straight quarterly improvement. To be sure, the revenue picture could darken if the U.S. economy double-dips. (The numbers in each category in the tables accompanying this article generally are based on the most recent and comprehensive data available, and so their dates don't all coincide. However, they do paint a good picture of each state's relative position against the others.)
And since the 2010 elections, new governors, mostly Republican, have come to the fore, unbeholden to the public-employee unions that have used political muscle to win cushy contracts and fat retiree pension and health benefits. The roster of new-breed, social-Darwinist figures includes the likes of Scott Walker of Wisconsin, John Kasich of Ohio, Rick Scott of Florida and Chris Christie of New Jersey, all following the successful path of two-term Indiana Gov. Mitch Daniels. Even prominent Democrat and New York Governor Andrew Cuomo, scion of a family steeped in Franklin Roosevelt's New Deal, has pushed state unions to accept contracts with a three-year wage freeze and five unpaid furlough days in the current fiscal year.
The governors want the unions to contribute more to their pension funds and health plans to ensure the systems' soundness. Controversially, Walker and Kasich even have tried to convince the unions to surrender or reduce their collective-bargaining rights. Moreover, many states are creating new tiers of public employees provided with much less munificent pension and health-care plans. Retirement ages are being boosted, automatic cost-of-living adjustments to pensions are being eliminated, pension vesting periods are being increased and shenanigans like income-spiking at the end of careers to fatten benefits are being banned. Such moves will do much to ameliorate a long-term pension and retiree health-benefit funding gap that The Pew Center on the States puts at $1.26 trillion.
At the same time, some states, including New York, are trying to cap and slow property-tax hikes. And while such governors as Walker, Christie and Scott are putting the axe to spending, they're also cutting taxes on corporations and the wealthy, with the aim of boosting employment and investment. Wisconsin even scaled back its earned-income tax credit for 152,000 working families ($518 for a family of five), to partially defray the cost of tax cuts for big earners. Trickle-up economics is in vogue in these states.
The process has been messy and, sometimes, noisy; witness the union demonstrations at the capitol building in Madison, Wis., in February. Yet the municipal-bond market has rallied sharply since late last year, when banking seer Meredith Whitney set off a panic by predicting that there would be as many as 100 major muni-bond defaults in calendar year 2011, totaling $100 billion or more, because of state and local financial problems. Through Aug. 12, a recent Bank of America Merrill Lynch report notes that defaults have been modest this year, at $757.8 million, or just 0.026% of total outstanding municipal debt. And most of the troubled issuers have been small ones that depend on revenue from special-assessment districts, housing developments and hospital complexes, not general tax revenues.
To Howard Cure, director of municipal research at Evercore Wealth Management in New York, it's "inconceivable" that any state will default on its general-obligation debt. According to Cure, the only risk that investors run in state debt, beyond the risk that could arise if interest rates jump, would come from credit downgrades or a change in market perceptions of a state's financial prospects, which could quickly push down prices of existing state bonds.
To help investors, the tables Barron's has compiled show how all 50 states rank, based on seven key financial and economic variables. The data were compiled by Janney Capital Markets and Evercore. The states are sorted by their Standard &Poor's credit ratings to make comparisons easier.
Our first statistic shows the amount of federal spending each state receives as a percentage of the state's gross domestic product. The source can be: defense or nondefense work; procurement contracts; grants; and salaries and wages paid to state residents by Uncle Sam. This reading is particularly timely, in that federal outlays face cuts for years to come, due to growing budget-deficit stringency.
Here, a couple of triple-A names -- Virginia and Maryland -- stick out. Federal spending accounts for 29.8% of Virginia's economy and 28.5% of Maryland's, far above the 19.7% that's the average in the U.S. Just think of all the federal employees who live in Arlington or Bethesda but work in Washington, or of the hordes who labor in the vast office parks outside the Beltway, filled with government consultants and federal contractors. The credit-rating firm Moody's has both states on "negative outlook" in the wake of the national-debt anxiety.
Medicaid as a percentage of total state spending is another key indicator. Nationally, the program, which provides health care for the poor, accounts for 21% of all state spending -- and will loom much larger if the Obama health reforms are upheld by the courts and fold in millions of currently uninsured into Medicaid, for which the federal government picks up about half the tab. Already, however, like Pac-Man, the program has ferociously eaten away at state financial resources due tomedical-cost inflation and rising enrollment.
Here, comparisons are difficult, because some states, like California (22%) and Illinois (33%), offer a far more extensive range of services than, say, Texas (8%). The Lone Star state also benefits because some members of its large Hispanic population are reluctant to sign up for government programs due to citizenship issues.
States with large urban underclasses also tend to have higher Medicaid rolls. That has swelled their spending -- New York's by 28%, Pennsylvania's by 28% and, of course, Illinois' (above). Not surprisingly, to curb the rise in Medicaid costs, states like New York are considering moving away from their current fee-for-service payment systems to managed care.
Tax-collection growth is where the rubber meets the road for most states. Many of the stars in this respect are benefiting from rising prices for oil, food and minerals. North Dakota had a 46% jump in first-quarter fiscal 2011 collections, boosted by exploitation of the gas- and oil-rich Bakken shale shelf. Alaska, with its tax take up by 16.7%, likewise benefited from higher oil prices.
Even some Rust Belt states -- Michigan (up 20.9%) and Ohio (up 22%) were helped, in part, by improved manufacturing. But, tax increases were the biggest factor in the improved revenue numbers. Illinois (up 13.7%) raised personal income and corporate levies at the beginning of calendar-year 2011. California, on the other hand, saw a package of emergency tax increases expire at the end of fiscal 2010, and thus realized a paltry 5.7% rise in tax receipts in fiscal 2011's first quarter, and there's little reason to believe that the situation has improved. So the no-longer-so-Golden State could face additional budget shortfalls in the current fiscal year.
Overall, however, tax-supported state debt as a percentage of state gross national product has hardly reached alarming levels. Even states like Connecticut and Hawaii, whose debt exceeds 10% of their gross domestic products, aren't basket cases. Both centralize more functions that local governments do elsewhere, so the figures are a bit deceiving.
The same doesn't hold true for the chronic underfunding problems of state public-employee pension plans. The public-employee pension funding gap accounts for around $660 billion of the aforementioned $1.26 trillion retiree-benefits shortfall tabulated by Pew. And unlike retiree health care, pension benefits are harder to fix.
Particularly shaky are states like Illinois, with only 51% of its pension obligations funded, and California, with 81%. Their dysfunctional state governments, allied with public-employee unions, are seemingly incapable of making needed reforms. Several times in recent years, Illinois has floated bond issues to make its pension contributions, only to find that it paid more in interest on them than it made on its investments.
The last two factors in our tables are the percentage of mortgages in foreclosure or seriously delinquent -- meaning 90 days in arrears -- as of fiscal 2011's first quarter, and the state's unemployment rate.
Florida, Nevada, Arizona and California still have big mortgage problems, stemming from the faux housing boom of the George W. Bush years. That encouraged local governments to wildly expand, using soaring property-tax revenue, and individuals to spend more, by taking out home-equity loans. When the boom ended, the spending did, too, and joblessness soared. Based on June numbers, the states with the worst jobless rates were Florida (10.6%), and Michigan and South Carolina (both 10.5%).
In sum, our tables should provide some clues for muni-bond investors puzzling out where to invest. But the most important factor isn't listed -- a state's willingness to embrace structural change. In that regard, Illinois and California bring up the rear.
.E-mail: editors@barrons.com
Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved
Nine Most Common IRA Mistakes (the Dolans)
Are You Making These IRA Mistakes?
by Ken Dolan September 2, 2009 10:26 AM
Posted in: Invest Wisely IRA Retirement Center
For millions of Americans, an Individual Retirement Account is a critical piece of their retirement plan. If you are eligible for an IRA, you should be contributing to it each and every year, period.
But if you want to make the very most of your IRA, you must avoid the mistakes that cost many people dearly.
Let's take a look at the nine most common.
IRA Mistake #1:
Not Contributing Because of Stock Market Volatility
We heard from LOTS ofpeople over the last few years who stopped contributing to their IRA because of market volatility. DON'T you be one of them!
No matter what the market does, you should take advantage of the important benefits your IRA offers. First, you still get an important tax break on the dollars you are contributing. Plus, if you work for a company that offers matching IRA contributions, you are actually making money. Why on earth would you give up FREE money from your boss??
IRA Mistake #2:
Not Knowing the Contribution Limit
Sometimes the most common mistakes are also the easiest to correct. Not knowing your contribution limit is a common mistake that can cost you thousands.
On one hand, if you don't contribute the maximum allowable amount into your IRA, you are missing out on some good tax deductions and tax-deferred earnings. On the other, if you over-contribute, you will have to pay a stiff penalty.
For 2011, the IRA contributions limits are as follows:
If you are under the age of 50 by the end of 2011, you can contribute $5,000.? That amount can be split between a Roth and traditional IRA if you'd like.
If you are over the age of 50 by the end of 2011, you can contribute $6,000.
IRA Mistake #3:
Not Naming a Beneficiary
When you set up an IRA, you are not required to name a beneficiary. Name one anyway!
If there is no beneficiary on your IRA, the money in the account will typically have to go through probate, which can be an expensive and lengthy process. Also, the funds will be paid out over the remaining life expectancy of the deceased (or over five years), which will likely be shorter than a named beneficiary's life expectancy. This means the money is disbursed more quickly, putting a heavier tax burden on whoever receives the money.
Avoid this major IRA mistake and name a beneficiary so you can be certain where your IRA will go, and how quickly it will be distributed upon your death.
IRA Mistake #4:
Not Contributing to a Spousal IRA
A spousal IRA is an important retirement planning tool WAY too many people overlook. If you or your spouse does not work, or works part-time and has no company benefits, you can open a spousal IRA in addition to a regular IRA. You can double your overall IRA contribution by using a spousal IRA in addition to the standard IRA.
IRA Mistake #5:
Not Starting Your Withdrawals on Time
Traditional, SEP and SIMPLE IRAs all require you to take withdrawals annually after you turn 70-?. (Special note: If you have a Roth IRA, there is no mandatory withdrawal age.)
If you don't take a mandatory withdrawal on time, you'll pay dearly for this mistake. You will be required to pay a 50% penalty on the required withdrawal amount. Ouch! What a waste for an easy-to-avoid mistake! Make your withdrawal at the right time and keep your hard-earned money to yourself.
Remember: Your first withdrawal is due by April 1 the year after your turn 70 1/2, and you'll have to take another one by December 31 of that same year.
IRA Mistake #6:
Not Withdrawing Enough
So now you know that traditional, SEP and SIMPLE IRAs require you to take annual withdrawals after you turn 70 1/2. But you can't just take out five bucks and wait till next year! The amount you must withdraw each year is dictated by formulas based on your life expectancy, your current age and the amount of money in your IRA account.
Check with your financial advisor or use the tables found in Appendix C of IRS Publication 590 to determine your minimum withdrawals. Make a mistake and you'll face a stiff 50% penalty on the difference between what you withdrew and what your required minimum distribution really was!
IRA Mistake #7:
Forgetting the Contribution Deadline
December 31 is the last day of the year, right? But not when it comes to contributing to your IRA! You have until April 15 of the following year, or the day that you file your tax returns, to make a contribution to your IRA for that tax year.
Remember, to make the most of your IRA contribution, we recommend that you fully fund your IRA as early in the year as possible. But when it comes to making IRA contributions, late is better than never!
Don't make one of the key IRA mistakes by forgetting about that extended contribution deadline!
IRA Mistake #8:
Mishandling an IRA Rollover
If you are switching jobs or you are an IRA beneficiary, you'll need to roll over those IRA funds. IRA rollovers don't have to be confusing or complicated, but you do need to follow some very specific rules.
Here's how to avoid two common IRA rollover mistakes. First, your rollover must be completed no more than sixty days from when the money is withdrawn from the original account. Anything not rolled over within those sixty days becomes 100% taxable income. You don't want that to happen!
Second, remember that you are only allowed one rollover - into or out of an individual IRA - per year. There is no bending of this rule, so follow it closely or you'll get stuck paying a hefty penalty!
IRA Mistake #9:
Not Knowing Spousal/Non-Spousal Inheritance Rules
One of the big IRA mistakes is not realizing the difference between inheritance rules for spousal and non-spousal beneficiaries. If you are a spousal beneficiary, you can either switch the name on the IRA or roll the funds directly into an IRA you already have. Either way, the money is viewed as if it has been yours all along (you can contribute to it and will be required to withdraw from it).
If you are a non-spousal beneficiary, the money in the IRA is still yours, but you are not able to roll it over to your own IRA, and you are not allowed to contribute to it.
Copyright © 2011 Dolans.com. All Rights Reserved.
by Ken Dolan September 2, 2009 10:26 AM
Posted in: Invest Wisely IRA Retirement Center
For millions of Americans, an Individual Retirement Account is a critical piece of their retirement plan. If you are eligible for an IRA, you should be contributing to it each and every year, period.
But if you want to make the very most of your IRA, you must avoid the mistakes that cost many people dearly.
Let's take a look at the nine most common.
IRA Mistake #1:
Not Contributing Because of Stock Market Volatility
We heard from LOTS ofpeople over the last few years who stopped contributing to their IRA because of market volatility. DON'T you be one of them!
No matter what the market does, you should take advantage of the important benefits your IRA offers. First, you still get an important tax break on the dollars you are contributing. Plus, if you work for a company that offers matching IRA contributions, you are actually making money. Why on earth would you give up FREE money from your boss??
IRA Mistake #2:
Not Knowing the Contribution Limit
Sometimes the most common mistakes are also the easiest to correct. Not knowing your contribution limit is a common mistake that can cost you thousands.
On one hand, if you don't contribute the maximum allowable amount into your IRA, you are missing out on some good tax deductions and tax-deferred earnings. On the other, if you over-contribute, you will have to pay a stiff penalty.
For 2011, the IRA contributions limits are as follows:
If you are under the age of 50 by the end of 2011, you can contribute $5,000.? That amount can be split between a Roth and traditional IRA if you'd like.
If you are over the age of 50 by the end of 2011, you can contribute $6,000.
IRA Mistake #3:
Not Naming a Beneficiary
When you set up an IRA, you are not required to name a beneficiary. Name one anyway!
If there is no beneficiary on your IRA, the money in the account will typically have to go through probate, which can be an expensive and lengthy process. Also, the funds will be paid out over the remaining life expectancy of the deceased (or over five years), which will likely be shorter than a named beneficiary's life expectancy. This means the money is disbursed more quickly, putting a heavier tax burden on whoever receives the money.
Avoid this major IRA mistake and name a beneficiary so you can be certain where your IRA will go, and how quickly it will be distributed upon your death.
IRA Mistake #4:
Not Contributing to a Spousal IRA
A spousal IRA is an important retirement planning tool WAY too many people overlook. If you or your spouse does not work, or works part-time and has no company benefits, you can open a spousal IRA in addition to a regular IRA. You can double your overall IRA contribution by using a spousal IRA in addition to the standard IRA.
IRA Mistake #5:
Not Starting Your Withdrawals on Time
Traditional, SEP and SIMPLE IRAs all require you to take withdrawals annually after you turn 70-?. (Special note: If you have a Roth IRA, there is no mandatory withdrawal age.)
If you don't take a mandatory withdrawal on time, you'll pay dearly for this mistake. You will be required to pay a 50% penalty on the required withdrawal amount. Ouch! What a waste for an easy-to-avoid mistake! Make your withdrawal at the right time and keep your hard-earned money to yourself.
Remember: Your first withdrawal is due by April 1 the year after your turn 70 1/2, and you'll have to take another one by December 31 of that same year.
IRA Mistake #6:
Not Withdrawing Enough
So now you know that traditional, SEP and SIMPLE IRAs require you to take annual withdrawals after you turn 70 1/2. But you can't just take out five bucks and wait till next year! The amount you must withdraw each year is dictated by formulas based on your life expectancy, your current age and the amount of money in your IRA account.
Check with your financial advisor or use the tables found in Appendix C of IRS Publication 590 to determine your minimum withdrawals. Make a mistake and you'll face a stiff 50% penalty on the difference between what you withdrew and what your required minimum distribution really was!
IRA Mistake #7:
Forgetting the Contribution Deadline
December 31 is the last day of the year, right? But not when it comes to contributing to your IRA! You have until April 15 of the following year, or the day that you file your tax returns, to make a contribution to your IRA for that tax year.
Remember, to make the most of your IRA contribution, we recommend that you fully fund your IRA as early in the year as possible. But when it comes to making IRA contributions, late is better than never!
Don't make one of the key IRA mistakes by forgetting about that extended contribution deadline!
IRA Mistake #8:
Mishandling an IRA Rollover
If you are switching jobs or you are an IRA beneficiary, you'll need to roll over those IRA funds. IRA rollovers don't have to be confusing or complicated, but you do need to follow some very specific rules.
Here's how to avoid two common IRA rollover mistakes. First, your rollover must be completed no more than sixty days from when the money is withdrawn from the original account. Anything not rolled over within those sixty days becomes 100% taxable income. You don't want that to happen!
Second, remember that you are only allowed one rollover - into or out of an individual IRA - per year. There is no bending of this rule, so follow it closely or you'll get stuck paying a hefty penalty!
IRA Mistake #9:
Not Knowing Spousal/Non-Spousal Inheritance Rules
One of the big IRA mistakes is not realizing the difference between inheritance rules for spousal and non-spousal beneficiaries. If you are a spousal beneficiary, you can either switch the name on the IRA or roll the funds directly into an IRA you already have. Either way, the money is viewed as if it has been yours all along (you can contribute to it and will be required to withdraw from it).
If you are a non-spousal beneficiary, the money in the IRA is still yours, but you are not able to roll it over to your own IRA, and you are not allowed to contribute to it.
Copyright © 2011 Dolans.com. All Rights Reserved.
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