Making Claims in the Lehman Brothers Bankruptcy:
The deadline for filing of proofs of claims against the Debtors has been established as September 22, 2009 at 5:00 p.m. Eastern Time for all claims
Obtain proof of claim forms from http://chap11.epiqsystems.com/LBH
Questions about the process can be directed to EPIQ BANKRUPTCY SOLUTIONS at
646 282 2500 or via their website www.epiqbankruptcysolutions.com/contact.htm
What You Will Find Here
- OJOS11
- Articles and news of general interest about investing, saving, personal finance, retirement, insurance, saving on taxes, college funding, financial literacy, estate planning, consumer education, long term care, financial services, help for seniors and business owners.
Blog List
-
-
Charlie Javice takes 'full responsibility,' asks for mercy ahead of JPMorgan Chase fraud sentencing - "There are no excuses, only regret," Javice wrote her judge Friday night, ahead of her sentencing for defrauding JPMorgan Chase out of $175 million
-
Energy Secretary Expects Fusion to Power the World in 8-15 Years - From theory and small-scale tests to reality, will fusion ever scale?
-
The Billion-Dollar Stakes for OpenAI - The artificial intelligence giant is closing in on a deal with Microsoft regarding its future governance, but other questions stand over its huge costs.
-
Everybody Else Is Reading This - Snowflakes That Stay On My Nose And Eyelashes Above The Law Trump’s New Birth Control […]
-
Maximizing Employer Stock Options - Oct 29 – On this edition of Lifetime Income, Paul Horn and Chris Preitauer discuss the benefits of employee stock options and how to best benefit from th...
-
Wayfair Needs to Prove This Isn't as Good as It Gets - Earnings were encouraging, but questions remain about the online retailer's long-term viability.
-
Hannity Promises To Expose CNN & NBC News In "EpicFail" - *"Tick tock."* In a mysterious tweet yesterday evening to his *3.19 million followers,* Fox News' Sean Hannity offered a preview of what is to come from ...
-
Don’t Forget These Important Retirement Deadlines - *Now that fall is in full swing, be sure to mark your calendar for steps that can help boost your tax-advantage retirement savings.*
Showing posts with label financial crisis. Lehman. Show all posts
Showing posts with label financial crisis. Lehman. Show all posts
When the Sky Falls - Ben Stein in the NY Times
October 26, 2008
Everybody’s Business
You Don’t Always Know When the Sky Will Fall
By BEN STEIN
NOW, as the great Phil Rizzuto used to say, for “some high hops and short stops” — only not in sports, but in finance and life.
First, I get a certain amount of mail asking why I was unable to spot the stock market crash in advance, sell short and become rich. And why was I unable to foretell the future, so my readers could avoid losses and make money?
Well, I am just a person. I don’t have any magical powers to foresee the future. In this case, I did not foresee the catastrophic mistake, as I view it, by Treasury Secretary Henry M. Paulson Jr. to allow Lehman Brothers to fail. That failure left a gaping hole in the financial services industry, and blew away confidence that the Feds knew what they were doing.
Months ago, one of the greatest of American economists, Anna Jacobson Schwartz, who was co-author with the late Milton Friedman of “A Monetary History of the United States,” accurately said that American banks did not face a liquidity crisis, but that they might soon urgently face a solvency crisis. In other words, banks would have ample reserves to lend but might lack assurances that they could meet all their financial obligations if those loans went bad. She was right. In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.
(By the way, it’s a disgrace that Mrs. Schwartz, a mainstay of economic insight since before World War II — as well as my late mother’s college roommate at Barnard — has not been a Nobel laureate. That hints at a dismal sexism in the dismal science.)
The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn’t.
After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks. But that didn’t happen, the stock market fell apart, credit went icy cold and the wheels started to come off the economy. This also took me by surprise.
The failure of government to limit the loss possibilities from credit-default swaps has also been a mystery to me. And credit-default swaps themselves are something of a mystery. They are derivative instruments that supposedly insure a bond or similar entity against default. In fact, they are a wager about the possibility of default of anything, and the potential payouts for the wagers that have been made are many times larger than the value of all the subprime mortgage bonds that ever were.
The need for the government to take action seemed so clear — and still seems so clear that I cannot believe a day passes without its happening. But the days pass, nothing happens, and I am proved wrong again. And I lose some of my life savings and it hurts.
Now let me move to another point: all of the recent misery, including the stock market’s plunge, the disasters at Fannie Mae and Freddie Mac, the loss of retirement savings. These did not happen out of the blue. The catastrophe of giving bonds ratings far higher than they deserved did not happen by chance. And endlessly rosy reports from banks and investment banks about their health did not result from a butterfly flapping its wings in China.
Human beings did these things. The harm to the American people and to the world has been substantial. There has been real pain here. Why is it taking so long to find out who did what and whether laws were broken? That’s what prosecutors are for.
And, closer to home, a talented makeup artist who works with me almost daily in my TV appearances asked what happened to people in a recession. (She is young.) I said that fear and insomnia happened to most people but that a few million would actually lose their jobs and millions more would lose income.
“What do they do?” she asked, looking worried.
“They find other work or live off their savings,” I said. “They certainly cut back on their spending.”
“What if they don’t have any savings?” she asked. “I don’t have any savings,” she said. “No one I know except you has any savings.” She looked extremely worried.
This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It’s the difference between life and death, terror and calm. So start saving right now, and don’t stop until you die.
FINALLY, I’ll turn to the oil companies. When crude was skyrocketing, the beautiful people wanted to beat Exxon Mobil, Chevron and BP into a pulp. Many people assumed that oil barons controlled prices, made “obscene” profits and made life difficult for ordinary citizens. But the price of oil has fallen by more than half from just a few months ago. Gasoline prices are at levels no one thought we would ever see again. Very expensive projects that the oil companies commenced, like extracting oil from tar sands in Canada, may now be major money losers.
What do you say, folks? Let’s acknowledge that we were a bit hasty. The oil companies are just corks bobbing up and down on the ocean of worldwide demand and supply, exactly as the oil companies said they were. They are not going to be starving, but they are clearly not the invincible demons that their enemies said they were. Now that we see how vulnerable they are, is there any reason to hit them with a surtax?
Will we ever learn that they are just dust in the wind, like the rest of us? Probably not.
Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.
Everybody’s Business
You Don’t Always Know When the Sky Will Fall
By BEN STEIN
NOW, as the great Phil Rizzuto used to say, for “some high hops and short stops” — only not in sports, but in finance and life.
First, I get a certain amount of mail asking why I was unable to spot the stock market crash in advance, sell short and become rich. And why was I unable to foretell the future, so my readers could avoid losses and make money?
Well, I am just a person. I don’t have any magical powers to foresee the future. In this case, I did not foresee the catastrophic mistake, as I view it, by Treasury Secretary Henry M. Paulson Jr. to allow Lehman Brothers to fail. That failure left a gaping hole in the financial services industry, and blew away confidence that the Feds knew what they were doing.
Months ago, one of the greatest of American economists, Anna Jacobson Schwartz, who was co-author with the late Milton Friedman of “A Monetary History of the United States,” accurately said that American banks did not face a liquidity crisis, but that they might soon urgently face a solvency crisis. In other words, banks would have ample reserves to lend but might lack assurances that they could meet all their financial obligations if those loans went bad. She was right. In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.
(By the way, it’s a disgrace that Mrs. Schwartz, a mainstay of economic insight since before World War II — as well as my late mother’s college roommate at Barnard — has not been a Nobel laureate. That hints at a dismal sexism in the dismal science.)
The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn’t.
After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks. But that didn’t happen, the stock market fell apart, credit went icy cold and the wheels started to come off the economy. This also took me by surprise.
The failure of government to limit the loss possibilities from credit-default swaps has also been a mystery to me. And credit-default swaps themselves are something of a mystery. They are derivative instruments that supposedly insure a bond or similar entity against default. In fact, they are a wager about the possibility of default of anything, and the potential payouts for the wagers that have been made are many times larger than the value of all the subprime mortgage bonds that ever were.
The need for the government to take action seemed so clear — and still seems so clear that I cannot believe a day passes without its happening. But the days pass, nothing happens, and I am proved wrong again. And I lose some of my life savings and it hurts.
Now let me move to another point: all of the recent misery, including the stock market’s plunge, the disasters at Fannie Mae and Freddie Mac, the loss of retirement savings. These did not happen out of the blue. The catastrophe of giving bonds ratings far higher than they deserved did not happen by chance. And endlessly rosy reports from banks and investment banks about their health did not result from a butterfly flapping its wings in China.
Human beings did these things. The harm to the American people and to the world has been substantial. There has been real pain here. Why is it taking so long to find out who did what and whether laws were broken? That’s what prosecutors are for.
And, closer to home, a talented makeup artist who works with me almost daily in my TV appearances asked what happened to people in a recession. (She is young.) I said that fear and insomnia happened to most people but that a few million would actually lose their jobs and millions more would lose income.
“What do they do?” she asked, looking worried.
“They find other work or live off their savings,” I said. “They certainly cut back on their spending.”
“What if they don’t have any savings?” she asked. “I don’t have any savings,” she said. “No one I know except you has any savings.” She looked extremely worried.
This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It’s the difference between life and death, terror and calm. So start saving right now, and don’t stop until you die.
FINALLY, I’ll turn to the oil companies. When crude was skyrocketing, the beautiful people wanted to beat Exxon Mobil, Chevron and BP into a pulp. Many people assumed that oil barons controlled prices, made “obscene” profits and made life difficult for ordinary citizens. But the price of oil has fallen by more than half from just a few months ago. Gasoline prices are at levels no one thought we would ever see again. Very expensive projects that the oil companies commenced, like extracting oil from tar sands in Canada, may now be major money losers.
What do you say, folks? Let’s acknowledge that we were a bit hasty. The oil companies are just corks bobbing up and down on the ocean of worldwide demand and supply, exactly as the oil companies said they were. They are not going to be starving, but they are clearly not the invincible demons that their enemies said they were. Now that we see how vulnerable they are, is there any reason to hit them with a surtax?
Will we ever learn that they are just dust in the wind, like the rest of us? Probably not.
Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.
The Lehman Legacy (from Financial Times)
The Lehman legacy: catalyst of the crisis
By Aline van Duyn, Deborah Brewster and Gillian Tett
Published: October 12 2008 19:26 | Last updated: October 12 2008 19:26
On September 15, Catherine Naud checked her Washington Mutual bank account before she began a 10-day road trip across Utah, Arizona and several other states. On her return to New York, Ms Naud, a scientist at Columbia University, logged on to her bank’s website. “I got a message that I was now a JPMorgan customer, that Washington Mutual no longer existed,” she says. “I was shocked.”
It is a reaction many other policymakers and investors would now echo – not just in relation to last month’s demise of WaMu, the largest US savings and loans association, but also to the wider financial crisis that is convulsing the global economy. After all, when the credit turmoil began just over a year ago, many bankers and policymakers maintained it would be over in a matter of months, since the losses could be easily “contained”.
While this view proved over-optimistic, a few months ago it did seem as if the worst of the financial panic might be ebbing away. More specifically, when Bear Stearns, a large US stockbroker, imploded back in March, some thought that might be the biggest upheaval the crisis would bring – not least because the markets rallied after Bear was acquired by JPMorgan Chase.
Instead, the sense of panic has escalated in the past few weeks, creating a fresh wave of bank failures. Consequently, as global leaders scramble to introduce emergency measures – including the prospect of governments taking direct stakes in banks – the question many non-bankers such as Ms Naud might ask is: why has all this become necessary? What has caused the resurgence in financial panic, in a manner that has apparently left global leaders so scared?
The catalyst arguably came four weeks ago on Monday, just as Ms Naud was setting off on her holiday. In the early hours of September 15, Lehman Brothers, the 158-year-old Wall Street institution, filed for bankruptcy. Despite round-the-clock talks with banks and investors over the preceding weekend, US financial authorities decided not to step in to prevent the collapse. “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers,” Hank Paulson, Treasury secretary, said the day after Lehman’s demise.
Six months earlier, the Federal Reserve and the Treasury had stepped in to prevent the rival Bear Stearns from filing for bankruptcy. After that, officials came to take the view that dealers and investors had become well aware Wall Street banks were no safe bet. These hopes were misplaced. The Lehman bankruptcy set in train a series of damaging events in an unexpected quarter: the $3,500bn (£2,055bn, €2,590bn) US money market fund industry, used by banks and companies across the world for their short-term financing needs.
The day after the bankruptcy, the $62bn Reserve Primary Fund, the country’s oldest money market fund, posted this sombre statement on its website: “The value of the debt securities issued by Lehman Brothers Holdings (face value $785m) and held by the Primary Fund has been valued at zero effective as of 4pm New York time today.”
THE TRANSATLANTIC TUSSLE
“Horrendous.” The terse description by Christine Lagarde, French finance minister, of the decision to let Lehman fail is one echoed by many other European policy makers and investors.
A crucial question still baffling observers is why the US allowed the collapse. Did officials not foresee the consequences? Or were they just determined to make a policy point – or unable to prevent it?
In Europe some blame the decision on ideology, claiming that Hank Paulson, US Treasury secretary, refused to offer aid to avoid accusations of moral hazard. Others wonder if officials were overwhelmed by the speed of events.
US officials dismiss claims of ideology or complacency; they insist that the Federal Reserve was keenly aware that the broker’s collapse could spark chain reactions. However, Washington effectively ran out of options because events were moving so fast – and its hands were tied by a pernicious combination of UK and US laws.
This legal saga started on the Thursday before Lehman failed, when it became clear it was close to collapse. At that stage, the Fed believed that it could legally only extend support if this was either secured against quality assets, or if it was part of a deal to help a willing buyer.
In the subsequent case of AIG, the Fed decided that the insurer had plenty of good assets. But with Lehman, the Fed was horrified at the size of the hole in the bank’s books. The Fed and the Treasury decided they had no legal mandate to risk extending a loan without a buyer (a situation which, crucially, no longer applies since the $700bn bail-out package).
Bank of America initially expressed interest in Lehman – but when it saw the books it demanded so much support that officials balked. Focus turned to Barclays which, it was thought, could do a deal without support. And even though the UK bank later asked for aid, its request was modest enough that many US officials thought a deal could be done – until Sunday.
What changed all this was a transatlantic tussle. The Barclays deal could only work if Lehman’s trading positions were guaranteed when markets opened on Monday. Other Wall Street banks were unwilling to do this. While Barclays appeared willing to offer some pledge, it became clear that UK listing rules prevented it from offering this without getting shareholder approval – an impossible task at such short notice.
In desperation Mr Paulson, called his British counterpart, Alistair Darling, and other UK policymakers. But London refused to waive the rules. Some US officials suspect that British regulators were reluctant to let Barclays proceed; UK officials argue that tearing up listing rules would have created more confusion and fear. Since Lehman was American, they argued that the onus was on Washington to be creative, most notably by providing a temporary government guarantee.
Either way, these discussions took place at such a late stage that by Sunday afternoon Washington felt it had no choice but to let Lehman go.
This pushed the value of the assets in the fund to below their $1 per share face value. In other words, the fund had “broken the buck” – an event greatly feared by regulators and fund managers since the start of the credit crisis more than a year before. “Lehman’s bankruptcy was so significant because it led a fund to break the buck,” says Deborah Cunningham, chief investment officer at Federated Investors, one of the biggest money market investors. “Lehman would probably not have had more of an effect on markets than any other bank collapse if it had not been for this tag-on effect in the money markets.”
Money market funds’ popularity rested on their reputation for being almost as secure as bank deposits. Marketers of the funds had long emphasised that only one small fund had ever “broken the buck”, and that was 14 years before. The fear was that once one fund showed that investors could lose their principal, the damage to the industry would be severe.
These concerns proved well founded. As word of the Reserve Fund’s predicament spread, investors fled. By that weekend, more than $200bn had been pulled from money market funds, by both retail and institutional investors. When other short-term funds, such as prime funds, are included, the amount that was taken out of short-term investments quickly reached $400bn.
That shift brought the funds under heavy pressure to sell into an illiquid market, simply to ensure they had enough cash to pay investors withdrawing their money. For banks, heavily reliant on these investors for their funding needs, it created a spiral of liquidity crises. “It was the straw that broke the camel’s back,” says Joe Lynagh, a portfolio manager at T. Rowe Price, an investment company.
To assure retail investors, the Fed quickly lined up a liquidity facility for money market funds, allowing them to sell short-term debt backed by assets. However, that was not enough. Last week, the Fed started buying commercial paper in an attempt to break the impasse, but it was too late for some banks faced with billions of dollars of short-term funding needs and nowhere to raise the money.
“The impact of the investor pullback is borne most heavily by banks that are predominantly reliant on wholesale funding, a group that includes many European banks,” says Alex Roever, analyst at JPMorgan. “This investor pullback from the secured dollar bank commercial paper market is a contributing factor in the recent wave of liquidity issues at European banks.”
Should this have been foreseen? There were plenty of market indicators suggesting Lehman could default – mainly the soaring cost of insuring in the credit derivatives market against that eventuality. Yet most investors holding cash bonds did not appear to be mentally or practically prepared for a default.
“Prior to Lehman, there was an almost unshakable faith that the senior creditors and counterparties of large, systemically important financial institutions would not face the risk of outright default,” notes Neil McLeish, analyst at Morgan Stanley. “This confidence was built up ever since the failure of Continental Illinois (at the time the seventh largest US bank) in 1984, a failure in which bondholders were [fully paid out].”
For months, regulators including the Bank of England as well as the Fed had been putting pressure on banks to prepare for a default by a big market participant. The risk of a bank collapsing under the weight of overvalued and illiquid mortgage backed securities and a funding crisis had been demonstrated by the fate of Bear Stearns.
With Wall Street’s big broker-dealers involved in millions of derivatives trades, which feature in contracts from basic hedges on oil prices to complex structured debt securities, regulators were worried that the unravelling of such trades could be the downfall of the financial system.
Yet it now seems that, with all the emphasis on limiting the fallout on markets such as derivatives, a more straightforward consequence of a bankruptcy was overlooked: the pain it imposes on creditors.
First, Lehman hurt its bondholders. Lehman was a very large borrower, with around $130bn in debt outstanding. The expected losses on these bonds spiralled swiftly. In early September, they were trading at 95 cents on the dollar but by the Monday after bankruptcy had fallen to around 40 cents – and last week to 10 cents. Its short-term debt – as the Primary Reserve Fund found – was essentially worthless.
Second, investors such as hedge funds, which had money or assets held at Lehman, were hurt, too. Hedge funds that were using Lehman as a prime broker found that their collateral was frozen as its complicated bankruptcy process got under way – which in turn effectively left many of these funds frozen as well.
“A lot of people did not understand the implications of Lehman’s default,” says a chief executive of a large hedge fund. “Whether it is a misimpression or bad assumptions, the fact is, as a hedge fund with balances at Lehman, you lost access to those balances when it went bankrupt. Hedge funds have joined the list of unsecured creditors and many were not prepared for this.”
To make matters worse, the fragmented legal infrastructure in Europe, combined with differences in bankruptcy laws with the US, left even expert lawyers uncertain about exactly how a bankruptcy might proceed. Many experts predict it could take years to unwind Lehman, the world’s biggest ever corporate bankruptcy case.
Hedge funds, like money market funds, have therefore shied away from an exposure to bank debt. “People are rightly a lot more conservative in their assumptions about credit risk,” says Ms Cunningham.
“After the failure of Lehman Brothers ... institutional investors have said that they would prefer to stay home,” says Bill Gross of Pimco, the bond fund manager. “Instead of risking their money [it] goes into that figurative mattress.”
Getting the money out of the mattress and back as a source of financing for banks is one of the biggest tasks now facing politicians. “With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system,” the International Monetary Fund said last week, warning that a failure to do so would be “costly for the real economy”.
Policymakers will on Monday be watching the markets closely in the hope that the weekend meetings on both sides of the Atlantic aimed at tackling the crisis will start to restore confidence in the global financial system.
But with so many professional investors having run for the exits, the key now is also to ensure people like Ms Naud do not become so worried that they take their money out of their newly renamed banks and place it under a rather more literal mattress.
Copyright The Financial Times Limited 2008
"FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms
© Copyright The Financial Times Ltd 2008.
By Aline van Duyn, Deborah Brewster and Gillian Tett
Published: October 12 2008 19:26 | Last updated: October 12 2008 19:26
On September 15, Catherine Naud checked her Washington Mutual bank account before she began a 10-day road trip across Utah, Arizona and several other states. On her return to New York, Ms Naud, a scientist at Columbia University, logged on to her bank’s website. “I got a message that I was now a JPMorgan customer, that Washington Mutual no longer existed,” she says. “I was shocked.”
It is a reaction many other policymakers and investors would now echo – not just in relation to last month’s demise of WaMu, the largest US savings and loans association, but also to the wider financial crisis that is convulsing the global economy. After all, when the credit turmoil began just over a year ago, many bankers and policymakers maintained it would be over in a matter of months, since the losses could be easily “contained”.
While this view proved over-optimistic, a few months ago it did seem as if the worst of the financial panic might be ebbing away. More specifically, when Bear Stearns, a large US stockbroker, imploded back in March, some thought that might be the biggest upheaval the crisis would bring – not least because the markets rallied after Bear was acquired by JPMorgan Chase.
Instead, the sense of panic has escalated in the past few weeks, creating a fresh wave of bank failures. Consequently, as global leaders scramble to introduce emergency measures – including the prospect of governments taking direct stakes in banks – the question many non-bankers such as Ms Naud might ask is: why has all this become necessary? What has caused the resurgence in financial panic, in a manner that has apparently left global leaders so scared?
The catalyst arguably came four weeks ago on Monday, just as Ms Naud was setting off on her holiday. In the early hours of September 15, Lehman Brothers, the 158-year-old Wall Street institution, filed for bankruptcy. Despite round-the-clock talks with banks and investors over the preceding weekend, US financial authorities decided not to step in to prevent the collapse. “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers,” Hank Paulson, Treasury secretary, said the day after Lehman’s demise.
Six months earlier, the Federal Reserve and the Treasury had stepped in to prevent the rival Bear Stearns from filing for bankruptcy. After that, officials came to take the view that dealers and investors had become well aware Wall Street banks were no safe bet. These hopes were misplaced. The Lehman bankruptcy set in train a series of damaging events in an unexpected quarter: the $3,500bn (£2,055bn, €2,590bn) US money market fund industry, used by banks and companies across the world for their short-term financing needs.
The day after the bankruptcy, the $62bn Reserve Primary Fund, the country’s oldest money market fund, posted this sombre statement on its website: “The value of the debt securities issued by Lehman Brothers Holdings (face value $785m) and held by the Primary Fund has been valued at zero effective as of 4pm New York time today.”
THE TRANSATLANTIC TUSSLE
“Horrendous.” The terse description by Christine Lagarde, French finance minister, of the decision to let Lehman fail is one echoed by many other European policy makers and investors.
A crucial question still baffling observers is why the US allowed the collapse. Did officials not foresee the consequences? Or were they just determined to make a policy point – or unable to prevent it?
In Europe some blame the decision on ideology, claiming that Hank Paulson, US Treasury secretary, refused to offer aid to avoid accusations of moral hazard. Others wonder if officials were overwhelmed by the speed of events.
US officials dismiss claims of ideology or complacency; they insist that the Federal Reserve was keenly aware that the broker’s collapse could spark chain reactions. However, Washington effectively ran out of options because events were moving so fast – and its hands were tied by a pernicious combination of UK and US laws.
This legal saga started on the Thursday before Lehman failed, when it became clear it was close to collapse. At that stage, the Fed believed that it could legally only extend support if this was either secured against quality assets, or if it was part of a deal to help a willing buyer.
In the subsequent case of AIG, the Fed decided that the insurer had plenty of good assets. But with Lehman, the Fed was horrified at the size of the hole in the bank’s books. The Fed and the Treasury decided they had no legal mandate to risk extending a loan without a buyer (a situation which, crucially, no longer applies since the $700bn bail-out package).
Bank of America initially expressed interest in Lehman – but when it saw the books it demanded so much support that officials balked. Focus turned to Barclays which, it was thought, could do a deal without support. And even though the UK bank later asked for aid, its request was modest enough that many US officials thought a deal could be done – until Sunday.
What changed all this was a transatlantic tussle. The Barclays deal could only work if Lehman’s trading positions were guaranteed when markets opened on Monday. Other Wall Street banks were unwilling to do this. While Barclays appeared willing to offer some pledge, it became clear that UK listing rules prevented it from offering this without getting shareholder approval – an impossible task at such short notice.
In desperation Mr Paulson, called his British counterpart, Alistair Darling, and other UK policymakers. But London refused to waive the rules. Some US officials suspect that British regulators were reluctant to let Barclays proceed; UK officials argue that tearing up listing rules would have created more confusion and fear. Since Lehman was American, they argued that the onus was on Washington to be creative, most notably by providing a temporary government guarantee.
Either way, these discussions took place at such a late stage that by Sunday afternoon Washington felt it had no choice but to let Lehman go.
This pushed the value of the assets in the fund to below their $1 per share face value. In other words, the fund had “broken the buck” – an event greatly feared by regulators and fund managers since the start of the credit crisis more than a year before. “Lehman’s bankruptcy was so significant because it led a fund to break the buck,” says Deborah Cunningham, chief investment officer at Federated Investors, one of the biggest money market investors. “Lehman would probably not have had more of an effect on markets than any other bank collapse if it had not been for this tag-on effect in the money markets.”
Money market funds’ popularity rested on their reputation for being almost as secure as bank deposits. Marketers of the funds had long emphasised that only one small fund had ever “broken the buck”, and that was 14 years before. The fear was that once one fund showed that investors could lose their principal, the damage to the industry would be severe.
These concerns proved well founded. As word of the Reserve Fund’s predicament spread, investors fled. By that weekend, more than $200bn had been pulled from money market funds, by both retail and institutional investors. When other short-term funds, such as prime funds, are included, the amount that was taken out of short-term investments quickly reached $400bn.
That shift brought the funds under heavy pressure to sell into an illiquid market, simply to ensure they had enough cash to pay investors withdrawing their money. For banks, heavily reliant on these investors for their funding needs, it created a spiral of liquidity crises. “It was the straw that broke the camel’s back,” says Joe Lynagh, a portfolio manager at T. Rowe Price, an investment company.
To assure retail investors, the Fed quickly lined up a liquidity facility for money market funds, allowing them to sell short-term debt backed by assets. However, that was not enough. Last week, the Fed started buying commercial paper in an attempt to break the impasse, but it was too late for some banks faced with billions of dollars of short-term funding needs and nowhere to raise the money.
“The impact of the investor pullback is borne most heavily by banks that are predominantly reliant on wholesale funding, a group that includes many European banks,” says Alex Roever, analyst at JPMorgan. “This investor pullback from the secured dollar bank commercial paper market is a contributing factor in the recent wave of liquidity issues at European banks.”
Should this have been foreseen? There were plenty of market indicators suggesting Lehman could default – mainly the soaring cost of insuring in the credit derivatives market against that eventuality. Yet most investors holding cash bonds did not appear to be mentally or practically prepared for a default.
“Prior to Lehman, there was an almost unshakable faith that the senior creditors and counterparties of large, systemically important financial institutions would not face the risk of outright default,” notes Neil McLeish, analyst at Morgan Stanley. “This confidence was built up ever since the failure of Continental Illinois (at the time the seventh largest US bank) in 1984, a failure in which bondholders were [fully paid out].”
For months, regulators including the Bank of England as well as the Fed had been putting pressure on banks to prepare for a default by a big market participant. The risk of a bank collapsing under the weight of overvalued and illiquid mortgage backed securities and a funding crisis had been demonstrated by the fate of Bear Stearns.
With Wall Street’s big broker-dealers involved in millions of derivatives trades, which feature in contracts from basic hedges on oil prices to complex structured debt securities, regulators were worried that the unravelling of such trades could be the downfall of the financial system.
Yet it now seems that, with all the emphasis on limiting the fallout on markets such as derivatives, a more straightforward consequence of a bankruptcy was overlooked: the pain it imposes on creditors.
First, Lehman hurt its bondholders. Lehman was a very large borrower, with around $130bn in debt outstanding. The expected losses on these bonds spiralled swiftly. In early September, they were trading at 95 cents on the dollar but by the Monday after bankruptcy had fallen to around 40 cents – and last week to 10 cents. Its short-term debt – as the Primary Reserve Fund found – was essentially worthless.
Second, investors such as hedge funds, which had money or assets held at Lehman, were hurt, too. Hedge funds that were using Lehman as a prime broker found that their collateral was frozen as its complicated bankruptcy process got under way – which in turn effectively left many of these funds frozen as well.
“A lot of people did not understand the implications of Lehman’s default,” says a chief executive of a large hedge fund. “Whether it is a misimpression or bad assumptions, the fact is, as a hedge fund with balances at Lehman, you lost access to those balances when it went bankrupt. Hedge funds have joined the list of unsecured creditors and many were not prepared for this.”
To make matters worse, the fragmented legal infrastructure in Europe, combined with differences in bankruptcy laws with the US, left even expert lawyers uncertain about exactly how a bankruptcy might proceed. Many experts predict it could take years to unwind Lehman, the world’s biggest ever corporate bankruptcy case.
Hedge funds, like money market funds, have therefore shied away from an exposure to bank debt. “People are rightly a lot more conservative in their assumptions about credit risk,” says Ms Cunningham.
“After the failure of Lehman Brothers ... institutional investors have said that they would prefer to stay home,” says Bill Gross of Pimco, the bond fund manager. “Instead of risking their money [it] goes into that figurative mattress.”
Getting the money out of the mattress and back as a source of financing for banks is one of the biggest tasks now facing politicians. “With financial markets worldwide facing growing turmoil, internationally coherent and decisive policy measures will be required to restore confidence in the global financial system,” the International Monetary Fund said last week, warning that a failure to do so would be “costly for the real economy”.
Policymakers will on Monday be watching the markets closely in the hope that the weekend meetings on both sides of the Atlantic aimed at tackling the crisis will start to restore confidence in the global financial system.
But with so many professional investors having run for the exits, the key now is also to ensure people like Ms Naud do not become so worried that they take their money out of their newly renamed banks and place it under a rather more literal mattress.
Copyright The Financial Times Limited 2008
"FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms
© Copyright The Financial Times Ltd 2008.
What Happened Last Week? from Randall Forsyth at Barron's
Home > Markets > Markets Page > Current Yield
MONDAY, SEPTEMBER 22, 2008
CURRENT YIELD
Credit Where Credit Is Due
By RANDALL W. FORSYTH
When credit collapses, nothing else can stand.
CREDIT COUNTS. IF YOU don't believe it now, you never will.
While multi-hundred-point gyrations in the Dow grabbed the media headlines, credit borrowing and lending -- the basic functions of finance, on which the real economy of producing, buying and selling depend to function from day to day -- came close to breaking down.
Nothing compares with what's happened in the past fortnight.
The government bailout of Fannie Mae and Freddie Mac, as announced Sunday, Sept. 7, was no surprise. It had been foretold on another balmy Sunday evening in mid-July, and became inevitable as the government-sponsored enterprises' ability to finance themselves was called into question.
But the Treasury bailout of Fannie and Freddie failed to stop the downward spiral. The following Sunday, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke declined to help fund a takeover of Lehman Brothers, as the central bank had done with JPMorgan Chase's acquisition of Bear Stearns in March. Lehman was left with no choice but to file for bankruptcy the following day.
Faced with the possibility it could meet a similar fate, Merrill Lynch rushed to merge with Bank of America. The Thundering Herd had always been fiercely independent, unlike Lehman or Morgan Stanley. (Remember their respective divorces from American Express and Dean Witter?) But getting $29 a share was a lot better than the $10 Bear got, and the zip Lehman received. Yet the prospect of failure by American International Group posed a bigger risk. AIG has a monstrous $1 trillion balance sheet and its "tentacles" were everywhere, as New York Gov. David Paterson characterized the reach of the nation's largest insurer.
Tuesday afternoon, the Federal Open Market Committee opted to hold its key target rate for federal funds unchanged, at 2%, confounding expectations of a cut by Fed watchers and the futures market. The reasoning would become apparent that evening. The central bank decided to provide a massive $85 billion loan to AIG at stringent terms, and an equity stake of 79.9%, the same as Treasury got for bailing out Fannie and Freddie.
But even that didn't calm the markets. Strains worsened after a major money market fund "broke the buck" -- that is, saw its share price fall below the sacrosanct $1.00-a-share level -- and suspended redemptions.
This was the result of unintended (but foreseeable) consequences. The money fund held Lehman paper, which it wrote down to zero, knocking its NAV to 97 cents. Holders, who had assumed they would always get a dollar out for every dollar they put in, bolted for the exits. This was especially the case of institutional money funds, which yanked $173 billion out in the week ended Wednesday, most of it that day. Instead, these investors fled for the safety of T-bills, sending their yields to virtually nil.
The tide ultimately was turned Thursday afternoon, after news reports indicated Washington was cooking up a massive scheme: A plan recalling the Resolution Trust Corp., which worked out the savings-and-loan failures of the late 1980s and 1990s, was in the works.
By Friday morning, it was official. Treasury Secretary Paulson announced that the plan would involve "hundreds of billions" of taxpayers' dollars to buy up bad assets.
In addition, the Treasury would provide insurance for money funds analogous to FDIC backing for bank deposits. That was aimed at stopping the modern-day bank run on the money funds and thus alleviating the strains on the money market. The Fed, for its part, also instituted an array of new lending facilities to stop the crunch. And, the SEC called a halt to short sales of financial stocks. That came in reaction to the wholesale selling of icons such as Goldman Sachs and Morgan Stanley. But their credit default swaps-derivatives insuring the credits of the investment banks-cratered to levels that implied imminent bankruptcy. Sellers of credit protection hedged their position by shorting the stock. The resulting plunge in the stock further tightened the credit vise.
The government's actions does help address the liquidity crisis, for now. Stocks soared Thursday and Friday, and the strains in money markets eased. But the crux of the crisis remains. Lenders can't lend while they're laden with underwater, illiquid assets and can't raise capital.
The government may have put out the fire. The rebuilding lies ahead.
MONDAY, SEPTEMBER 22, 2008
CURRENT YIELD
Credit Where Credit Is Due
By RANDALL W. FORSYTH
When credit collapses, nothing else can stand.
CREDIT COUNTS. IF YOU don't believe it now, you never will.
While multi-hundred-point gyrations in the Dow grabbed the media headlines, credit borrowing and lending -- the basic functions of finance, on which the real economy of producing, buying and selling depend to function from day to day -- came close to breaking down.
Nothing compares with what's happened in the past fortnight.
The government bailout of Fannie Mae and Freddie Mac, as announced Sunday, Sept. 7, was no surprise. It had been foretold on another balmy Sunday evening in mid-July, and became inevitable as the government-sponsored enterprises' ability to finance themselves was called into question.
But the Treasury bailout of Fannie and Freddie failed to stop the downward spiral. The following Sunday, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke declined to help fund a takeover of Lehman Brothers, as the central bank had done with JPMorgan Chase's acquisition of Bear Stearns in March. Lehman was left with no choice but to file for bankruptcy the following day.
Faced with the possibility it could meet a similar fate, Merrill Lynch rushed to merge with Bank of America. The Thundering Herd had always been fiercely independent, unlike Lehman or Morgan Stanley. (Remember their respective divorces from American Express and Dean Witter?) But getting $29 a share was a lot better than the $10 Bear got, and the zip Lehman received. Yet the prospect of failure by American International Group posed a bigger risk. AIG has a monstrous $1 trillion balance sheet and its "tentacles" were everywhere, as New York Gov. David Paterson characterized the reach of the nation's largest insurer.
Tuesday afternoon, the Federal Open Market Committee opted to hold its key target rate for federal funds unchanged, at 2%, confounding expectations of a cut by Fed watchers and the futures market. The reasoning would become apparent that evening. The central bank decided to provide a massive $85 billion loan to AIG at stringent terms, and an equity stake of 79.9%, the same as Treasury got for bailing out Fannie and Freddie.
But even that didn't calm the markets. Strains worsened after a major money market fund "broke the buck" -- that is, saw its share price fall below the sacrosanct $1.00-a-share level -- and suspended redemptions.
This was the result of unintended (but foreseeable) consequences. The money fund held Lehman paper, which it wrote down to zero, knocking its NAV to 97 cents. Holders, who had assumed they would always get a dollar out for every dollar they put in, bolted for the exits. This was especially the case of institutional money funds, which yanked $173 billion out in the week ended Wednesday, most of it that day. Instead, these investors fled for the safety of T-bills, sending their yields to virtually nil.
The tide ultimately was turned Thursday afternoon, after news reports indicated Washington was cooking up a massive scheme: A plan recalling the Resolution Trust Corp., which worked out the savings-and-loan failures of the late 1980s and 1990s, was in the works.
By Friday morning, it was official. Treasury Secretary Paulson announced that the plan would involve "hundreds of billions" of taxpayers' dollars to buy up bad assets.
In addition, the Treasury would provide insurance for money funds analogous to FDIC backing for bank deposits. That was aimed at stopping the modern-day bank run on the money funds and thus alleviating the strains on the money market. The Fed, for its part, also instituted an array of new lending facilities to stop the crunch. And, the SEC called a halt to short sales of financial stocks. That came in reaction to the wholesale selling of icons such as Goldman Sachs and Morgan Stanley. But their credit default swaps-derivatives insuring the credits of the investment banks-cratered to levels that implied imminent bankruptcy. Sellers of credit protection hedged their position by shorting the stock. The resulting plunge in the stock further tightened the credit vise.
The government's actions does help address the liquidity crisis, for now. Stocks soared Thursday and Friday, and the strains in money markets eased. But the crux of the crisis remains. Lenders can't lend while they're laden with underwater, illiquid assets and can't raise capital.
The government may have put out the fire. The rebuilding lies ahead.
Safety First (from Barrons)
Monday, September 15, 2008
Retirement: Safety First
By KAREN HUBE
Risk experts explain how to keep your nest egg from cracking in shaky markets. Also, which investments offer the most stable returns during slumps? And, exotic real estate -- with an American twist.
THESE ARE SCARY TIMES FOR INVESTORS TRYING to protect and increase their retirement portfolios. With stock prices gyrating and major financial institutions crumbling, the mattress may look like as good a place as any to stash your holdings.
Not so fast. Take it from five titans of risk management: There are steps you can take to protect your nest egg for as longs the tumult lasts -- steps that will make sharp market dips much easier to endure.
Even better, without sacrificing those safeguards, you can position your retirement funds to participate in the earliest gains as the stock market begins to recover. And yes, these experts say, the market will recover.
So heed the practical advice and recommendations of the intellects whose views you'll read on the following pages -- Barton Briggs, Peter Bernstein, Charles Ellis, David Darst and Jeremy Siegel -- and reserve that mattress for some peaceful sleep.
Brad Trent
Peter Bernstein
Founder, Peter L. Bernstein Inc.
After almost six decades of contemplating market risk, Peter Bernstein knows how to spot investors' worst-case scenarios before they do. These days, what he sees concerns him deeply.
As the current economic crisis unfolds in ways that even the most bearish Wall Street strategists never predicted, Bernstein says any number of disasters could still be in store for investors. For those saving for retirement, in particular, taking protective measures is critical.
"The goal for investors right now should be survival, not making a killing," says Bernstein, who has been an economics professor and money manager, and is the author of several books, including Against the Gods, a classic on risk. "You should be thinking about how to hedge against extreme outcomes."
With markets down and unemployment and home foreclosures rising, what more could happen?
"A major bank failure, causing a run on banks in general," Bernstein speculates. Or "a run on the dollar, perhaps provoked by what foreigners view as too big a fiscal deficit."
Or runaway inflation or deflation, either of which could be disastrous for long-term retirement investors.
The next step of this crisis is hard to predict, Bernstein says, because the crisis is so unusual. "Nothing like this has ever happened before," he continues. "There have been credit crunches and housing crises and dollar crises, but having all the chickens coming home to roost at the same time and interacting with one another is unique. We have historical perspective on the parts, but not the whole, and that makes things both interesting and scary."
He suggests diversifying a portfolio so that it is not only exposed to many different markets, but also to ensure it can weather all kinds of scenarios.
For example, to guard against rampant inflation, every portfolio should contain at least a sprinkling of Treasury inflation-protected securities and short-term Treasuries, Bernstein suggests.
The TIPS come with a guaranteed return above inflation, and short-term Treasuries enable you to roll your money into higher-yielding issues every 90 days if inflation rises and interest rates follow.
"Short-term Treasuries aren't a very good holding under normal conditions, but they are a hedge against extreme conditions," Bernstein says. Long-term Treasuries are a good hedge against deflation, he adds.
Bernstein also recommends holding some gold as a hedge against a collapse in the value of the dollar if China or other nations decide they no longer want to invest as much in U.S. Treasuries. "In a total disaster, where there is a run from paper currency, you'll get your biggest bang for your buck in gold," he says.
You don't have to buy much gold to have an effective hedge, he adds, noting that "if everything hits the fan, gold could be worth several thousand dollars an ounce." It is now valued at about $750 an ounce.
Above all, don't let your defensive attitude waver, Bernstein counsels.
"Every day, we are faced by the possibility that something we never dreamed of will happen," he cautions.
"In 1958, I'd been in the business for seven years when, for the first time in history, bonds yielded more than stocks. My associates said, 'It's an anomaly, don't worry, it will be reversed.' It's 50 years later, and I'm still waiting."
Gary Spector
Charles Ellis
Founder, Greenwich Associates
In Japan, investors fill their stock portfolios primarily with Japanese companies. The French place their biggest bets on French companies. The story is the same in New Zealand, India, Russia, and around the globe: Investors favor their own countries' stocks.
For U.S. investors it's easy to criticize foreign investors for being provincial. But Charles Ellis, a former chair of Yale's Investment Committee and a consultant for institutional investors, has a suggestion for them: Look in the mirror.
The typical U.S. investor holds at least 85% of his stock portfolio in domestic stocks, even though the U.S. stock market accounts for only 40% to 45% of the world's total stock-market value.
"People feel more comfortable emphasizing their own country, because they recognize the company names," says Ellis, whose internationally renowned book is Winning the Loser's Game. "But from a pure investment point of view, it doesn't do any good" -- particularly for folks investing for retirement and other long-term goals, he says.
A U.S.-centric stock portfolio creates high levels of volatility, and denies investors the benefit of surging markets around the world, Ellis notes.
The best risk-adjusted returns over the long term can be scored by matching the market capitalization weightings of the world's markets, Ellis says. That would mean putting 45% in domestic stocks, 47% in developed foreign markets and 8% in developing foreign markets.
The idea is to have no bets on whether one market or another will be stronger in coming months.
"If you said, 'I don't really have a smart idea about the direction of the markets, I'm just a sensible person, what should I do?,' the answer is to go to a global index and start there," Ellis says. "If you have reason to make any changes from there...then you can adjust it from a neutral to an opinionated portfolio."
Traditionally, investors have been hesitant to plunge more deeply into foreign markets -- because of perceptions that foreign-currency exposure presents too much risk, foreign companies don't get enough oversight from their governments, and foreign markets are simply too volatile.
To Ellis, however, the truly global allocation of assets trumps all those concerns.
"There really is a free lunch, and it's called diversification," he says. "By diversifying, you reduce your risk substantially. It doesn't cost anything, and you get something for it."
Evan Kafka
Barton Biggs
Managing Partner, Traxis Partners
When the herd zigs, Barton Biggs zags. So it shouldn't be a surprise that while U.S. investors can't dump their technology stocks fast enough these days, Biggs has been declaring that now is the time to get into the trampled tech sector.
The best values right now, he says, are in large-cap, high-quality stocks around the world, "but particularly in the U.S., and within that category, technology appeals to me the most."
Biggs, co-founder and managing partner of the $1.3 billion hedge fund Traxis Partners in New York, is the former global investment strategist at Morgan Stanley.
"We've been in a period of stagnation in terms of tech spending since the bubble burst in 2000. The next recovery is going to be marked by unusual spending in all types of technology...and the sector will be one of the first areas to pick up as the U.S. and the world begin to recover," Biggs says.
A market recovery, he believes, will begin in the first half of 2009. By then, oil prices should be consistently below $120 a barrel, and the housing market should have started stabilizing.
Due to the government's takeover of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) -- which he characterizes as "one of the most important events of the last 20 years" -- further declines in home prices are likely to be more moderate than expected earlier.
But don't wait for an economic recovery in order to step into large domestic stocks and global tech stocks, or "the markets will already be up," Biggs says. "I wouldn't be surprised if later, in retrospect, we will find that the stock market is at its bottom about now."
Biggs is a notoriously trend-bucking strategist, which has sometimes paid off massively for those who follow him. In the late 1990s, he spared his clients huge losses by predicting the technology-driven bull market was going to plummet. And in 2003, when investors were steering clear of Japan, he moved into the Japanese stock market, adding untold wealth to clients' portfolios in the following three years as Japan soared.
Today, while many Wall Street strategists are recommending an underweighted position in stocks, Biggs is defiantly upbeat." The public has been selling stocks and has an incredible amount of liquidity, and so have institutions and hedge funds," he says.
"The fact that everyone is cautious has raised a lot of investable funds, and that's bullish," he adds. "We're in a stage where ordinary investors ought to be buying on weakness," says Biggs.
Some of his top picks: Cisco (CSCO), IBM (IBM) and Google (GOOG).
Biggs is steering clear, for now, of stocks in the materials, energy, agricultural and industrial- and oil-commodity sectors, but notes that "those will come on strong again -- but not until further into the recovery."
Dave Moser
Jeremy Siegel,
Professor, Wharton School
To most investors, dividend-paying stocks seem about as cutting edge as a corded telephone. Yet Jeremy Siegel talks about stock dividends with the enthusiasm and sense of discovery of a first-time iPhone user.
Through his recent research, Siegel, a finance professor at the University of Pennsylvania's Wharton School of Business, has become enamored of the dividend, and hopes to elevate its status from a humdrum staple for retirement-income seekers to a punch-packing contributor to younger investors' retirement portfolios.
He argues that the tendency of investors to look solely at the growth rates of earnings, sales and cash flow hurts them in the long run. The bias toward high-growth companies causes them to miss out on the high dividend-paying companies whose total returns, contrary to popular perception, have historically outshined the performance of growth stocks over time, he says.
"Everyone thinks it's old-fashioned to think about dividends, but investors have historically gotten about an extra two or three percentage points a year of higher returns by investing in the highest dividend-yielding stocks and reinvesting the dividends," says Siegel, author of The Future for Investors, Stocks for The Long Run, and other books.
One of his most striking examples is the difference in fortunes between people who invested in IBM rather than Standard Oil, now ExxonMobil (XOM), in 1950. Over the next five decades, through 2003, IBM trounced Standard Oil in per-share growth of revenue, dividends and earnings. But Standard Oil had a higher total return: A $1,000 investment in Standard Oil would have grown to $1.26 million with dividends reinvested, compared to $961,000 -- 24% less -- for IBM investors. "And that was before the recent energy price increases," Siegel says.
While financial companies historically have been reliable dividend payers, the dividends on Fannie Mae and Freddie Mac have been halted, and 21 financial-services firms have cut their payouts since the beginning of this year, according to Standard & Poor's. In a typical year, two or three financial firms cut their dividends, but the majority of them increase their payouts.
Long a supporter of index investing, Siegel now favors index funds that rebalance on a dividend-weighted basis. Siegel is a senior investment strategy adviser at WisdomTree, which has developed a series of funds that operate this way.
A dividend-weighted index rebalances regularly to favor stocks that pay the highest dividend. Most indexed portfolios, in contrast, rebalance based on the market capitalization of the stocks. With a dividend-weighted index, investors end up buying stocks when their prices are low relative to their fundamentals. A high dividend yield is a strong indication that a stock is undervalued, Siegel says.
Throughout history, dividend-paying stocks have gotten the spotlight. When the tech bubble burst in 2000, many investors sought out dividend-paying stocks to try to steady their portfolios. In 2003, payouts got a boost when the tax rate on dividends was changed to the 15% capital-gains rate, versus the higher income-tax rates.
Some of this tax benefit may get rolled back if Sen. Barack Obama (D.-Ill.) is elected president; he has said he would raise the dividend tax rate to 20% -- "but that's still a preferred rate," Siegel points out. He adds that investors who keep a steady spotlight on the high dividend-paying stocks in their portfolios are likely to have a brighter retirement.
Gary Spector
David Darst
Global Wealth Management Group,
Morgan Stanley
David Darst is the Iron Chef of the investment world. As chief investment strategist at Morgan Stanley's Global Wealth Management Group for the past 11 years and one of Wall Street's foremost experts on asset allocation, Darst spends much of his time considering the perfect ingredients -- of a portfolio, that is. He takes a little of this, blends it with a little of that, and -- voilà ! -- produces nourishing retirement portfolios.
Investors who have seen the air sucked out of their retirement portfolios lately might need convincing. The problem in the typical portfolio, Darst suspects, is that most people skimp on alternative investments like commodities, real estate and hedge funds.
"The perception is that they're too risky, but we view the benefits of alternatives more by the reduced volatility they bring to a portfolio than by an increased return," says Darst, who recommends that folks with $1 million to $20 million to allocate 20% to alternative investments, and those with less, 8%.
While any particular alternative investment may, indeed, be more volatile than the broad stock or bond markets, a portfolio diversified across stocks, fixed income, and a number of different alternatives will likely be less risky than one with fewer asset classes -- and it may even score higher returns, Darst says.
Consider a portfolio with 40% invested in stocks and the rest split between commodities and real estate. That may sound risky, but according to Ned Davis Research, in the 35 years through 2007, such a portfolio had the same risk as a portfolio with 40% invested in stocks and 60% in bonds. Yet it gained almost two percentage points more per year -- 12.47% versus 10.5%.
Within an alternative-investment portfolio, Darst recommends a 50% weighting in hedge funds, which gives investors the potential to benefit from talented money managers who have the freedom to invest where and how they see fit, without constraint.
Some 20% should be in real assets, such as commodities and gold. Both provide a hedge against inflation, and gold in particular has been a historic refuge in times of turmoil in the financial markets, political instability, or other crises.
Another 20% should be directed to managed-futures funds, Darst says. These invest by going long or short futures contracts in a broad basket of commodities and other investments, including metals, grains, sugar, foreign currencies, stocks and bonds.
Managed-futures funds provide a cushion to portfolios in down markets, because they typically are inversely related to the stock market, Darst says.
During the period 2000 to 2002, when the tech bubble burst and the Standard & Poor's 500 cratered 31%, the Barclay CTA Index of Managed Futures Funds was up 20%. In the fourth quarter of 1987, when the U.S. stock market crashed and the S&P 500 lost 22.5%, the Barclay index was up 13.8%. This year through August, the S&P 500 was down 14%, while the Barclay index was up 6.95%.
Lastly, Darst recommends placing 10% of a portfolio in Treasury inflation-protected securities to get their risk-dampening benefits, Darst says.
While he has usually included real estate in the alternative-investments portfolio through direct investments or REITs (real-estate investment trusts), he predicted enormous volatility in the sector last December and made a tactical move to eliminate real estate from his models.
For the average investor, however, it would take a rare event to prompt the removal of an asset class from the alternative-investments portfolio, because that could mean missing its next surge.
Says Darst: "You want to have all of your relatives at the table. Not just the 17-year-old singer in the family that everyone has always listened to, but the quiet nephew who turns out to win the Pulitzer Prize."
Follow advice like that, and investors themselves just might take home a prize.
E-mail comments to mail@barrons.com
URL for this article:
http://online.barrons.com/article/SB122125832882730055.html
CONTINUED
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.
Close
Retirement: Safety First
By KAREN HUBE
Risk experts explain how to keep your nest egg from cracking in shaky markets. Also, which investments offer the most stable returns during slumps? And, exotic real estate -- with an American twist.
THESE ARE SCARY TIMES FOR INVESTORS TRYING to protect and increase their retirement portfolios. With stock prices gyrating and major financial institutions crumbling, the mattress may look like as good a place as any to stash your holdings.
Not so fast. Take it from five titans of risk management: There are steps you can take to protect your nest egg for as longs the tumult lasts -- steps that will make sharp market dips much easier to endure.
Even better, without sacrificing those safeguards, you can position your retirement funds to participate in the earliest gains as the stock market begins to recover. And yes, these experts say, the market will recover.
So heed the practical advice and recommendations of the intellects whose views you'll read on the following pages -- Barton Briggs, Peter Bernstein, Charles Ellis, David Darst and Jeremy Siegel -- and reserve that mattress for some peaceful sleep.
Brad Trent
Peter Bernstein
Founder, Peter L. Bernstein Inc.
After almost six decades of contemplating market risk, Peter Bernstein knows how to spot investors' worst-case scenarios before they do. These days, what he sees concerns him deeply.
As the current economic crisis unfolds in ways that even the most bearish Wall Street strategists never predicted, Bernstein says any number of disasters could still be in store for investors. For those saving for retirement, in particular, taking protective measures is critical.
"The goal for investors right now should be survival, not making a killing," says Bernstein, who has been an economics professor and money manager, and is the author of several books, including Against the Gods, a classic on risk. "You should be thinking about how to hedge against extreme outcomes."
With markets down and unemployment and home foreclosures rising, what more could happen?
"A major bank failure, causing a run on banks in general," Bernstein speculates. Or "a run on the dollar, perhaps provoked by what foreigners view as too big a fiscal deficit."
Or runaway inflation or deflation, either of which could be disastrous for long-term retirement investors.
The next step of this crisis is hard to predict, Bernstein says, because the crisis is so unusual. "Nothing like this has ever happened before," he continues. "There have been credit crunches and housing crises and dollar crises, but having all the chickens coming home to roost at the same time and interacting with one another is unique. We have historical perspective on the parts, but not the whole, and that makes things both interesting and scary."
He suggests diversifying a portfolio so that it is not only exposed to many different markets, but also to ensure it can weather all kinds of scenarios.
For example, to guard against rampant inflation, every portfolio should contain at least a sprinkling of Treasury inflation-protected securities and short-term Treasuries, Bernstein suggests.
The TIPS come with a guaranteed return above inflation, and short-term Treasuries enable you to roll your money into higher-yielding issues every 90 days if inflation rises and interest rates follow.
"Short-term Treasuries aren't a very good holding under normal conditions, but they are a hedge against extreme conditions," Bernstein says. Long-term Treasuries are a good hedge against deflation, he adds.
Bernstein also recommends holding some gold as a hedge against a collapse in the value of the dollar if China or other nations decide they no longer want to invest as much in U.S. Treasuries. "In a total disaster, where there is a run from paper currency, you'll get your biggest bang for your buck in gold," he says.
You don't have to buy much gold to have an effective hedge, he adds, noting that "if everything hits the fan, gold could be worth several thousand dollars an ounce." It is now valued at about $750 an ounce.
Above all, don't let your defensive attitude waver, Bernstein counsels.
"Every day, we are faced by the possibility that something we never dreamed of will happen," he cautions.
"In 1958, I'd been in the business for seven years when, for the first time in history, bonds yielded more than stocks. My associates said, 'It's an anomaly, don't worry, it will be reversed.' It's 50 years later, and I'm still waiting."
Gary Spector
Charles Ellis
Founder, Greenwich Associates
In Japan, investors fill their stock portfolios primarily with Japanese companies. The French place their biggest bets on French companies. The story is the same in New Zealand, India, Russia, and around the globe: Investors favor their own countries' stocks.
For U.S. investors it's easy to criticize foreign investors for being provincial. But Charles Ellis, a former chair of Yale's Investment Committee and a consultant for institutional investors, has a suggestion for them: Look in the mirror.
The typical U.S. investor holds at least 85% of his stock portfolio in domestic stocks, even though the U.S. stock market accounts for only 40% to 45% of the world's total stock-market value.
"People feel more comfortable emphasizing their own country, because they recognize the company names," says Ellis, whose internationally renowned book is Winning the Loser's Game. "But from a pure investment point of view, it doesn't do any good" -- particularly for folks investing for retirement and other long-term goals, he says.
A U.S.-centric stock portfolio creates high levels of volatility, and denies investors the benefit of surging markets around the world, Ellis notes.
The best risk-adjusted returns over the long term can be scored by matching the market capitalization weightings of the world's markets, Ellis says. That would mean putting 45% in domestic stocks, 47% in developed foreign markets and 8% in developing foreign markets.
The idea is to have no bets on whether one market or another will be stronger in coming months.
"If you said, 'I don't really have a smart idea about the direction of the markets, I'm just a sensible person, what should I do?,' the answer is to go to a global index and start there," Ellis says. "If you have reason to make any changes from there...then you can adjust it from a neutral to an opinionated portfolio."
Traditionally, investors have been hesitant to plunge more deeply into foreign markets -- because of perceptions that foreign-currency exposure presents too much risk, foreign companies don't get enough oversight from their governments, and foreign markets are simply too volatile.
To Ellis, however, the truly global allocation of assets trumps all those concerns.
"There really is a free lunch, and it's called diversification," he says. "By diversifying, you reduce your risk substantially. It doesn't cost anything, and you get something for it."
Evan Kafka
Barton Biggs
Managing Partner, Traxis Partners
When the herd zigs, Barton Biggs zags. So it shouldn't be a surprise that while U.S. investors can't dump their technology stocks fast enough these days, Biggs has been declaring that now is the time to get into the trampled tech sector.
The best values right now, he says, are in large-cap, high-quality stocks around the world, "but particularly in the U.S., and within that category, technology appeals to me the most."
Biggs, co-founder and managing partner of the $1.3 billion hedge fund Traxis Partners in New York, is the former global investment strategist at Morgan Stanley.
"We've been in a period of stagnation in terms of tech spending since the bubble burst in 2000. The next recovery is going to be marked by unusual spending in all types of technology...and the sector will be one of the first areas to pick up as the U.S. and the world begin to recover," Biggs says.
A market recovery, he believes, will begin in the first half of 2009. By then, oil prices should be consistently below $120 a barrel, and the housing market should have started stabilizing.
Due to the government's takeover of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) -- which he characterizes as "one of the most important events of the last 20 years" -- further declines in home prices are likely to be more moderate than expected earlier.
But don't wait for an economic recovery in order to step into large domestic stocks and global tech stocks, or "the markets will already be up," Biggs says. "I wouldn't be surprised if later, in retrospect, we will find that the stock market is at its bottom about now."
Biggs is a notoriously trend-bucking strategist, which has sometimes paid off massively for those who follow him. In the late 1990s, he spared his clients huge losses by predicting the technology-driven bull market was going to plummet. And in 2003, when investors were steering clear of Japan, he moved into the Japanese stock market, adding untold wealth to clients' portfolios in the following three years as Japan soared.
Today, while many Wall Street strategists are recommending an underweighted position in stocks, Biggs is defiantly upbeat." The public has been selling stocks and has an incredible amount of liquidity, and so have institutions and hedge funds," he says.
"The fact that everyone is cautious has raised a lot of investable funds, and that's bullish," he adds. "We're in a stage where ordinary investors ought to be buying on weakness," says Biggs.
Some of his top picks: Cisco (CSCO), IBM (IBM) and Google (GOOG).
Biggs is steering clear, for now, of stocks in the materials, energy, agricultural and industrial- and oil-commodity sectors, but notes that "those will come on strong again -- but not until further into the recovery."
Dave Moser
Jeremy Siegel,
Professor, Wharton School
To most investors, dividend-paying stocks seem about as cutting edge as a corded telephone. Yet Jeremy Siegel talks about stock dividends with the enthusiasm and sense of discovery of a first-time iPhone user.
Through his recent research, Siegel, a finance professor at the University of Pennsylvania's Wharton School of Business, has become enamored of the dividend, and hopes to elevate its status from a humdrum staple for retirement-income seekers to a punch-packing contributor to younger investors' retirement portfolios.
He argues that the tendency of investors to look solely at the growth rates of earnings, sales and cash flow hurts them in the long run. The bias toward high-growth companies causes them to miss out on the high dividend-paying companies whose total returns, contrary to popular perception, have historically outshined the performance of growth stocks over time, he says.
"Everyone thinks it's old-fashioned to think about dividends, but investors have historically gotten about an extra two or three percentage points a year of higher returns by investing in the highest dividend-yielding stocks and reinvesting the dividends," says Siegel, author of The Future for Investors, Stocks for The Long Run, and other books.
One of his most striking examples is the difference in fortunes between people who invested in IBM rather than Standard Oil, now ExxonMobil (XOM), in 1950. Over the next five decades, through 2003, IBM trounced Standard Oil in per-share growth of revenue, dividends and earnings. But Standard Oil had a higher total return: A $1,000 investment in Standard Oil would have grown to $1.26 million with dividends reinvested, compared to $961,000 -- 24% less -- for IBM investors. "And that was before the recent energy price increases," Siegel says.
While financial companies historically have been reliable dividend payers, the dividends on Fannie Mae and Freddie Mac have been halted, and 21 financial-services firms have cut their payouts since the beginning of this year, according to Standard & Poor's. In a typical year, two or three financial firms cut their dividends, but the majority of them increase their payouts.
Long a supporter of index investing, Siegel now favors index funds that rebalance on a dividend-weighted basis. Siegel is a senior investment strategy adviser at WisdomTree, which has developed a series of funds that operate this way.
A dividend-weighted index rebalances regularly to favor stocks that pay the highest dividend. Most indexed portfolios, in contrast, rebalance based on the market capitalization of the stocks. With a dividend-weighted index, investors end up buying stocks when their prices are low relative to their fundamentals. A high dividend yield is a strong indication that a stock is undervalued, Siegel says.
Throughout history, dividend-paying stocks have gotten the spotlight. When the tech bubble burst in 2000, many investors sought out dividend-paying stocks to try to steady their portfolios. In 2003, payouts got a boost when the tax rate on dividends was changed to the 15% capital-gains rate, versus the higher income-tax rates.
Some of this tax benefit may get rolled back if Sen. Barack Obama (D.-Ill.) is elected president; he has said he would raise the dividend tax rate to 20% -- "but that's still a preferred rate," Siegel points out. He adds that investors who keep a steady spotlight on the high dividend-paying stocks in their portfolios are likely to have a brighter retirement.
Gary Spector
David Darst
Global Wealth Management Group,
Morgan Stanley
David Darst is the Iron Chef of the investment world. As chief investment strategist at Morgan Stanley's Global Wealth Management Group for the past 11 years and one of Wall Street's foremost experts on asset allocation, Darst spends much of his time considering the perfect ingredients -- of a portfolio, that is. He takes a little of this, blends it with a little of that, and -- voilà ! -- produces nourishing retirement portfolios.
Investors who have seen the air sucked out of their retirement portfolios lately might need convincing. The problem in the typical portfolio, Darst suspects, is that most people skimp on alternative investments like commodities, real estate and hedge funds.
"The perception is that they're too risky, but we view the benefits of alternatives more by the reduced volatility they bring to a portfolio than by an increased return," says Darst, who recommends that folks with $1 million to $20 million to allocate 20% to alternative investments, and those with less, 8%.
While any particular alternative investment may, indeed, be more volatile than the broad stock or bond markets, a portfolio diversified across stocks, fixed income, and a number of different alternatives will likely be less risky than one with fewer asset classes -- and it may even score higher returns, Darst says.
Consider a portfolio with 40% invested in stocks and the rest split between commodities and real estate. That may sound risky, but according to Ned Davis Research, in the 35 years through 2007, such a portfolio had the same risk as a portfolio with 40% invested in stocks and 60% in bonds. Yet it gained almost two percentage points more per year -- 12.47% versus 10.5%.
Within an alternative-investment portfolio, Darst recommends a 50% weighting in hedge funds, which gives investors the potential to benefit from talented money managers who have the freedom to invest where and how they see fit, without constraint.
Some 20% should be in real assets, such as commodities and gold. Both provide a hedge against inflation, and gold in particular has been a historic refuge in times of turmoil in the financial markets, political instability, or other crises.
Another 20% should be directed to managed-futures funds, Darst says. These invest by going long or short futures contracts in a broad basket of commodities and other investments, including metals, grains, sugar, foreign currencies, stocks and bonds.
Managed-futures funds provide a cushion to portfolios in down markets, because they typically are inversely related to the stock market, Darst says.
During the period 2000 to 2002, when the tech bubble burst and the Standard & Poor's 500 cratered 31%, the Barclay CTA Index of Managed Futures Funds was up 20%. In the fourth quarter of 1987, when the U.S. stock market crashed and the S&P 500 lost 22.5%, the Barclay index was up 13.8%. This year through August, the S&P 500 was down 14%, while the Barclay index was up 6.95%.
Lastly, Darst recommends placing 10% of a portfolio in Treasury inflation-protected securities to get their risk-dampening benefits, Darst says.
While he has usually included real estate in the alternative-investments portfolio through direct investments or REITs (real-estate investment trusts), he predicted enormous volatility in the sector last December and made a tactical move to eliminate real estate from his models.
For the average investor, however, it would take a rare event to prompt the removal of an asset class from the alternative-investments portfolio, because that could mean missing its next surge.
Says Darst: "You want to have all of your relatives at the table. Not just the 17-year-old singer in the family that everyone has always listened to, but the quiet nephew who turns out to win the Pulitzer Prize."
Follow advice like that, and investors themselves just might take home a prize.
E-mail comments to mail@barrons.com
URL for this article:
http://online.barrons.com/article/SB122125832882730055.html
CONTINUED
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.
Close
Protection for Credit Union Accounts - from National Credit Union Association (NCUA)
http://webapps.ncua.gov/
What is the Standard Maximum Share Insurance Amount or SMSIA for NCUSIF share insurance coverage?
The SMSIA for a credit union member is defined in NCUA’s Rules and Regulations, as $100,000 and may be increased from time to time. Share accounts maintained in different rights or capacities, or forms of ownership, may each be separately insured up to the $100,000 SMSIA, or in the case of certain retirement accounts, up to $250,000. Thus, a member may hold or have an interest in more than one separately insured share account in the same insured credit union.
What types of accounts are insured?
All types of member share accounts and deposits received by the credit union in its usual course of business, including regular shares, share certificates, and share draft accounts are insured. Investment products offered by a credit union to its members, such as mutual funds, annuities, and other non-deposit investments are not insured by the NCUSIF.
Is NCUSIF share insurance coverage increased by placing funds in two or more of the same kind of share accounts in the same credit union?
No. NCUSIF share insurance is not increased merely by dividing funds owned by the same person or persons into one or more of the different kinds of share accounts available. For example, a regular share account, a share draft account and a share certificate account owned by the same member are added together and insured up to the $100,000 SMSIA. Insurance can be increased by opening a different type of account - one that is held in a different right and capacity. For example, insurance on a single ownership account is separate from insurance on a joint account.
If a member has accounts in several different insured credit unions, will the accounts be added together for the purpose of insurance coverage?
No. Share insurance is applied to share accounts in each insured credit union. A member who has share accounts in two or more different insured credit unions would have coverage up to the full insurable amount in each credit union. In the case of a credit union having one or more branches, the main office and all branch offices are considered as one credit union.
What is the Standard Maximum Share Insurance Amount or SMSIA for NCUSIF share insurance coverage?
The SMSIA for a credit union member is defined in NCUA’s Rules and Regulations, as $100,000 and may be increased from time to time. Share accounts maintained in different rights or capacities, or forms of ownership, may each be separately insured up to the $100,000 SMSIA, or in the case of certain retirement accounts, up to $250,000. Thus, a member may hold or have an interest in more than one separately insured share account in the same insured credit union.
What types of accounts are insured?
All types of member share accounts and deposits received by the credit union in its usual course of business, including regular shares, share certificates, and share draft accounts are insured. Investment products offered by a credit union to its members, such as mutual funds, annuities, and other non-deposit investments are not insured by the NCUSIF.
Is NCUSIF share insurance coverage increased by placing funds in two or more of the same kind of share accounts in the same credit union?
No. NCUSIF share insurance is not increased merely by dividing funds owned by the same person or persons into one or more of the different kinds of share accounts available. For example, a regular share account, a share draft account and a share certificate account owned by the same member are added together and insured up to the $100,000 SMSIA. Insurance can be increased by opening a different type of account - one that is held in a different right and capacity. For example, insurance on a single ownership account is separate from insurance on a joint account.
If a member has accounts in several different insured credit unions, will the accounts be added together for the purpose of insurance coverage?
No. Share insurance is applied to share accounts in each insured credit union. A member who has share accounts in two or more different insured credit unions would have coverage up to the full insurable amount in each credit union. In the case of a credit union having one or more branches, the main office and all branch offices are considered as one credit union.
Information from FDIC - Federal Deposit Insurance Corporation
Insuring Your Deposits
(from www.fdic.gov)
What Is the FDIC?
The FDIC – short for the Federal Deposit Insurance Corporation – is an independent agency of the United States government. The FDIC protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government. The term “insured bank” is used in this brochure to mean any bank or savings association with FDIC insurance.
To check whether your bank or savings association is insured by FDIC, call toll-free 1-877-275-3342, use "Bank Find" at www.fdic.gov/deposit/index.html, or look for the official FDIC sign where deposits are received.
Why Is FDIC Insurance Important to You?
All FDIC-insured banks must meet high standards for financial strength and stability. The FDIC, with other federal and state regulatory agencies, regularly reviews the operations of insured banks to ensure these standards are met. Even with these safeguards, some insured banks fail. If your insured bank fails, FDIC insurance will cover your deposits, dollar for dollar, including principal and any accrued interest, up to the insurance limit.
Historically, insured deposits are available to customers of a failed bank within just a few days. Since the start of the FDIC in 1933, no depositor has ever lost a penny of insured deposits.
What Does the FDIC Insure?
The FDIC insures all deposits at insured banks, including checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit.
The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank.
Basic Insurance Amount Is $100,000
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
If you and your family have $100,000 or less in all of your deposit accounts at the same insured bank, you do not need to worry about your insurance coverage -- your deposits are fully insured.
Coverage Over $100,000
The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership.
You may qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories.
Common Ownership Categories
The most common ownership categories are:
Single Accounts
Certain Retirement Accounts
Joint Accounts
Revocable Trust Accounts
Single Accounts
These are deposit accounts owned by one person and titled in that person’s name only. All of your single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together and the total is insured up to $100,000.
Note: Retirement accounts and qualifying trust accounts are not included in this ownership category.
Certain Retirement Accounts
These are deposit accounts owned by one person and titled in the name of that person’s retirement plan. Only the following types of retirement plans are insured in this ownership category:
Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs
Section 457 deferred compensation plan accounts (whether self-directed or not)
Self-directed defined contribution plan accounts
Self-directed Keogh plan (or H.R. 10 plan) accounts
All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. For example, if an individual has an IRA and a self-directed Keogh account at the same bank, the deposits in both accounts would be added together and insured up to $250,000.
Naming beneficiaries on a retirement account does not increase deposit insurance coverage.
Joint Accounts
These are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person’s shares of all joint accounts at the same insured bank are added together and the total is insured up to $100,000.
If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner's shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple's joint accounts.
Example: John and Mary have a $220,000 CD at an insured bank. Under FDIC rules, each person's share of each joint account is considered equal unless otherwise stated in the bank’s records. John and Mary each own $110,000 in the joint account category, putting a total of $20,000 ($10,000 for each) over the insurance limit.
Account Holders Ownership Share Amount Insured Amount Uninsured
John $ 110,000 $ 100,000 $ 10,000
Mary $ 110,000 $ 100,000 $ 10,000
Total $ 220,000 $ 200,000 $ 20,000
Note: Jointly owned qualifying trust accounts are not included in this ownership category.
Revocable Trust Accounts
These are deposits held in either payable-on-death (POD) accounts or living trust accounts.
Payable-on-death (POD) accounts – also known as testamentary or Totten Trust accounts – are the most common form of revocable trust deposits. These informal revocable trusts are created when the account owner signs an agreement – usually part of the bank's signature card – stating that the deposits will be payable to one or more named beneficiaries upon the owner's death.
Living trusts – or family trusts – are formal revocable trusts created for estate planning purposes. The owner of a living trust controls the deposits in the trust during his or her lifetime.
Note: Determining coverage for living trust accounts can be complicated and requires more detailed information about the FDIC's insurance rules than can be provided in this publication. If you have a living trust account, contact the FDIC at 1-877-275-3342 for more information.
Deposit insurance coverage for revocable trust accounts is based on each owner's trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account. The FDIC insures the interests of each beneficiary up to $100,000 for each owner if all of the following requirements are met:
The beneficiary is the owner's spouse, child, grandchild, parent, or sibling. Adopted and stepchildren, grandchildren, parents, and siblings also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts do not qualify.
The account title must indicate the existence of the trust relationship by including a term such as payable on death, in trust for, trust, living trust, family trust, or an acronym such as POD or ITF.
For POD accounts, each beneficiary must be identified by name in the bank's account records.
If any of these requirements are not met, the entire amount in the account, or any portion of the account that does not qualify, would be added to the owner's other single accounts, if any, at the same bank and insured up to $100,000. If the revocable trust account has more than one owner, the FDIC would insure each owner's share as his or her single account.
Note: The following example applies to POD accounts only. Coverage may be different for some living trusts.
Example: Bill has a $100,000 POD account with his wife Sue as beneficiary. Sue has a $100,000 POD account with Bill as beneficiary. In addition, Bill and Sue jointly have a $600,000 POD account with their three children as equal beneficiaries.
Account Title Account Balance Amount Insured Amount Uninsured
Bill POD to Sue $ 100,000 $ 100,000 $ 0
Sue POD to Bill $ 100,000 $ 100,000 $ 0
Bill & Sue POD to 3 children $ 600,000 $ 600,000 $ 0
Total $ 800,000 $ 800,000 $ 0
These three accounts totaling $800,000 are fully insured because each owner is entitled to $100,000 of coverage for the interests of each qualifying beneficiary in the accounts. Bill has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – his wife in the first account and his three children in the third account). Sue also has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – her husband in the second account and her three children in the third account).
When calculating coverage for revocable trust accounts, be careful to avoid these common mistakes:
Do not assume that coverage is calculated as $100,000 times the number of people –owner(s) and beneficiary(ies) – named on a trust account. Coverage is provided for the interest of each qualifying beneficiary named by each owner. Additional coverage is not provided to the owners for naming themselves as owners. For example, a father's POD account naming two sons as equal beneficiaries is insured to $200,000 only -- $100,000 for the interest of each qualifying beneficiary.
Do not assume that the FDIC insures POD and living trust accounts separately. In applying the $100,000 per-beneficiary insurance limit, the FDIC combines an owner's POD accounts with the living trust accounts that name the same beneficiaries at the same bank.
For More Information from the FDIC
Call toll-free at:
1-877-ASK-FDIC (1-877-275-3342)
from 8 am until 8 pm (Eastern Time)
Monday through Friday
Hearing Impaired Line:
1-800-925-4618
Calculate your insurance coverage using the FDIC's online Electronic Deposit Insurance Estimator at: www2.fdic.gov/edie
Request a copy of "Your Insured Deposits: FDIC's Guide to Deposit Insurance Coverage," which provides a detailed description of the ownership categories, by calling toll free at: 1-877-275-3342
For downloadable, camera-ready files of "Your Insured Deposit" and "Insuring Your Deposit," visit " Reprintable FDIC Brochures" at www.fdic.gov, "About FDIC."
Read more about FDIC insurance online at: www.fdic.gov/deposit/deposits
Order FDIC deposit insurance products online at www2.fdic.gov/depositinsuranceregister
Send your questions by e-mail using the FDIC's online Customer Assistance Form at: www2.fdic.gov/starsmail
Mail your questions to:
Federal Deposit Insurance Corporation
Attn: Deposit Insurance Outreach
550 17th Street, NW
Washington, DC 20429-9990
(from www.fdic.gov)
What Is the FDIC?
The FDIC – short for the Federal Deposit Insurance Corporation – is an independent agency of the United States government. The FDIC protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government. The term “insured bank” is used in this brochure to mean any bank or savings association with FDIC insurance.
To check whether your bank or savings association is insured by FDIC, call toll-free 1-877-275-3342, use "Bank Find" at www.fdic.gov/deposit/index.html, or look for the official FDIC sign where deposits are received.
Why Is FDIC Insurance Important to You?
All FDIC-insured banks must meet high standards for financial strength and stability. The FDIC, with other federal and state regulatory agencies, regularly reviews the operations of insured banks to ensure these standards are met. Even with these safeguards, some insured banks fail. If your insured bank fails, FDIC insurance will cover your deposits, dollar for dollar, including principal and any accrued interest, up to the insurance limit.
Historically, insured deposits are available to customers of a failed bank within just a few days. Since the start of the FDIC in 1933, no depositor has ever lost a penny of insured deposits.
What Does the FDIC Insure?
The FDIC insures all deposits at insured banks, including checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit (CDs), up to the insurance limit.
The FDIC does not insure the money you invest in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank.
Basic Insurance Amount Is $100,000
The basic insurance amount is $100,000 per depositor per insured bank. Certain retirement accounts, such as Individual Retirement Accounts, are insured up to $250,000 per depositor per insured bank.
If you and your family have $100,000 or less in all of your deposit accounts at the same insured bank, you do not need to worry about your insurance coverage -- your deposits are fully insured.
Coverage Over $100,000
The FDIC provides separate insurance coverage for deposit accounts held in different categories of ownership.
You may qualify for more than $100,000 in coverage at one insured bank if you own deposit accounts in different ownership categories.
Common Ownership Categories
The most common ownership categories are:
Single Accounts
Certain Retirement Accounts
Joint Accounts
Revocable Trust Accounts
Single Accounts
These are deposit accounts owned by one person and titled in that person’s name only. All of your single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together and the total is insured up to $100,000.
Note: Retirement accounts and qualifying trust accounts are not included in this ownership category.
Certain Retirement Accounts
These are deposit accounts owned by one person and titled in the name of that person’s retirement plan. Only the following types of retirement plans are insured in this ownership category:
Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs
Section 457 deferred compensation plan accounts (whether self-directed or not)
Self-directed defined contribution plan accounts
Self-directed Keogh plan (or H.R. 10 plan) accounts
All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. For example, if an individual has an IRA and a self-directed Keogh account at the same bank, the deposits in both accounts would be added together and insured up to $250,000.
Naming beneficiaries on a retirement account does not increase deposit insurance coverage.
Joint Accounts
These are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person’s shares of all joint accounts at the same insured bank are added together and the total is insured up to $100,000.
If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner's shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple's joint accounts.
Example: John and Mary have a $220,000 CD at an insured bank. Under FDIC rules, each person's share of each joint account is considered equal unless otherwise stated in the bank’s records. John and Mary each own $110,000 in the joint account category, putting a total of $20,000 ($10,000 for each) over the insurance limit.
Account Holders Ownership Share Amount Insured Amount Uninsured
John $ 110,000 $ 100,000 $ 10,000
Mary $ 110,000 $ 100,000 $ 10,000
Total $ 220,000 $ 200,000 $ 20,000
Note: Jointly owned qualifying trust accounts are not included in this ownership category.
Revocable Trust Accounts
These are deposits held in either payable-on-death (POD) accounts or living trust accounts.
Payable-on-death (POD) accounts – also known as testamentary or Totten Trust accounts – are the most common form of revocable trust deposits. These informal revocable trusts are created when the account owner signs an agreement – usually part of the bank's signature card – stating that the deposits will be payable to one or more named beneficiaries upon the owner's death.
Living trusts – or family trusts – are formal revocable trusts created for estate planning purposes. The owner of a living trust controls the deposits in the trust during his or her lifetime.
Note: Determining coverage for living trust accounts can be complicated and requires more detailed information about the FDIC's insurance rules than can be provided in this publication. If you have a living trust account, contact the FDIC at 1-877-275-3342 for more information.
Deposit insurance coverage for revocable trust accounts is based on each owner's trust relationship with each qualifying beneficiary. While the trust owner is the insured party, coverage is provided for the interests of each beneficiary in the account. The FDIC insures the interests of each beneficiary up to $100,000 for each owner if all of the following requirements are met:
The beneficiary is the owner's spouse, child, grandchild, parent, or sibling. Adopted and stepchildren, grandchildren, parents, and siblings also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts do not qualify.
The account title must indicate the existence of the trust relationship by including a term such as payable on death, in trust for, trust, living trust, family trust, or an acronym such as POD or ITF.
For POD accounts, each beneficiary must be identified by name in the bank's account records.
If any of these requirements are not met, the entire amount in the account, or any portion of the account that does not qualify, would be added to the owner's other single accounts, if any, at the same bank and insured up to $100,000. If the revocable trust account has more than one owner, the FDIC would insure each owner's share as his or her single account.
Note: The following example applies to POD accounts only. Coverage may be different for some living trusts.
Example: Bill has a $100,000 POD account with his wife Sue as beneficiary. Sue has a $100,000 POD account with Bill as beneficiary. In addition, Bill and Sue jointly have a $600,000 POD account with their three children as equal beneficiaries.
Account Title Account Balance Amount Insured Amount Uninsured
Bill POD to Sue $ 100,000 $ 100,000 $ 0
Sue POD to Bill $ 100,000 $ 100,000 $ 0
Bill & Sue POD to 3 children $ 600,000 $ 600,000 $ 0
Total $ 800,000 $ 800,000 $ 0
These three accounts totaling $800,000 are fully insured because each owner is entitled to $100,000 of coverage for the interests of each qualifying beneficiary in the accounts. Bill has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – his wife in the first account and his three children in the third account). Sue also has $400,000 of insurance coverage ($100,000 for the interests of each qualifying beneficiary – her husband in the second account and her three children in the third account).
When calculating coverage for revocable trust accounts, be careful to avoid these common mistakes:
Do not assume that coverage is calculated as $100,000 times the number of people –owner(s) and beneficiary(ies) – named on a trust account. Coverage is provided for the interest of each qualifying beneficiary named by each owner. Additional coverage is not provided to the owners for naming themselves as owners. For example, a father's POD account naming two sons as equal beneficiaries is insured to $200,000 only -- $100,000 for the interest of each qualifying beneficiary.
Do not assume that the FDIC insures POD and living trust accounts separately. In applying the $100,000 per-beneficiary insurance limit, the FDIC combines an owner's POD accounts with the living trust accounts that name the same beneficiaries at the same bank.
For More Information from the FDIC
Call toll-free at:
1-877-ASK-FDIC (1-877-275-3342)
from 8 am until 8 pm (Eastern Time)
Monday through Friday
Hearing Impaired Line:
1-800-925-4618
Calculate your insurance coverage using the FDIC's online Electronic Deposit Insurance Estimator at: www2.fdic.gov/edie
Request a copy of "Your Insured Deposits: FDIC's Guide to Deposit Insurance Coverage," which provides a detailed description of the ownership categories, by calling toll free at: 1-877-275-3342
For downloadable, camera-ready files of "Your Insured Deposit" and "Insuring Your Deposit," visit " Reprintable FDIC Brochures" at www.fdic.gov, "About FDIC."
Read more about FDIC insurance online at: www.fdic.gov/deposit/deposits
Order FDIC deposit insurance products online at www2.fdic.gov/depositinsuranceregister
Send your questions by e-mail using the FDIC's online Customer Assistance Form at: www2.fdic.gov/starsmail
Mail your questions to:
Federal Deposit Insurance Corporation
Attn: Deposit Insurance Outreach
550 17th Street, NW
Washington, DC 20429-9990
from Fox News New York - Lehman Bankruptcy
Judge Says Lehman Can Sell Units To Barclays
Last Edited: Saturday, 20 Sep 2008, 9:42 AM EDT
Created: Saturday, 20 Sep 2008, 9:42 AM EDT
Lehman specialist Elizabeth Rose smiles as she works at her post on the floor of the New York Stock Exchange, Friday Sept. 19, 2008. Wall Street extended a huge rally Friday as investors stormed back into the market, relieved that the government plans to restore calm to the financial system by rescuing banks from billions of dollars in bad debt. (AP Photo/Richard Drew) By VINNEE TONG
AP Business Writer
NEW YORK -- A bankruptcy judge approved a plan just after midnight Saturday under which Lehman Brothers will sell its investment banking and trading businesses to Barclays.
The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman's Midtown Manhattan office tower.
Lehman filed the biggest bankruptcy in U.S. history Monday, after Barclays declined to buy the investment bank in its entirety.
The British bank will take control of Lehman units that employ about 9,000 employees in the U.S.
"Not only is the sale a good match economically, but it will save the jobs of thousands of employees," Lehman lawyer Harvey Miller of Weil, Gotshal & Manges said.
Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays' main reason for acquiring Lehman is to get its people and presence in North America, making widespread layoffs less likely.
"It's unimaginable to me that they can run the business without people," said Lehman's financial adviser, Barry Ridings, of Lazard Ltd.
Barclays had little competition to land the deal.
Miller said that before it filed for bankruptcy, Lehman had negotiated with just one other bidder, Bank of America Corp. BofA instead announced Monday that it would buy Merrill Lynch & Co., saving it from a fate similar to Lehman's. That deal was originally valued at $50 billion.
Miller said that since Lehman filed for bankruptcy, Barclays had been the only buyer to express interest in acquiring even parts of the 158-year-old investment bank.
Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 p.m. Friday and continued well past midnight Saturday.
Lehman lawyers said the value of stock Barclays will buy and liabilities it will assume has fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.
Barclays also said it would buy three additional units -- Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA. The two South American entities are part of Lehman's money management business. Barclays is not paying extra to get the three units.
There was no change to a $250 million goodwill payment and the purchase of two data centers in New Jersey that will go to Barclays, although Barclays may pay less for them. Lehman's investment management business Neuberger Berman was not bought by Barclays.
The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts -- about 130,000 of which are owned by individual investors -- to Barclays accounts.
"The substance of this transaction is to continue a business for the benefit of the economy," Lehman lawyer Miller said in court.
The hearing drew more than 200 lawyers and observers, who spilled into overflow rooms on two floors of the U.S. Bankruptcy Court in Lower Manhattan.
In response to the extraordinary events of the week, the Bush administration announced Friday the biggest proposed government intervention in financial markets since the Great Depression. Some are calling it an "RTC-style bailout" in reference to the government-owned Resolution Trust Corp. that wound down the assets of Savings and Loan Associations, mostly in the 1980s.
"Somehow Lehman Brothers gets left on the sidelines," said Daniel Golden of Akin Gump Strauss Hauer & Feld LLP, who represents clients holding about $9 billion in bonds. "We believe this was a flawed sales process. It benefits Barclays and the federal government but not the creditors of this estate.
"The economic landscape seems to have changed over the last two days," he said. "Yet the debtors and the Fed seem determined that nothing get in the way of this transaction."
Had Lehman filed for Chapter 11 a week later than it had, its fate may have been different.
"This is a tragedy -- maybe we missed the RTC by a week," Miller said.
"That occurred to me, as well," the judge in the case, James Peck, said. "Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets."
www.myfoxny.com
Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Last Edited: Saturday, 20 Sep 2008, 9:42 AM EDT
Created: Saturday, 20 Sep 2008, 9:42 AM EDT
Lehman specialist Elizabeth Rose smiles as she works at her post on the floor of the New York Stock Exchange, Friday Sept. 19, 2008. Wall Street extended a huge rally Friday as investors stormed back into the market, relieved that the government plans to restore calm to the financial system by rescuing banks from billions of dollars in bad debt. (AP Photo/Richard Drew) By VINNEE TONG
AP Business Writer
NEW YORK -- A bankruptcy judge approved a plan just after midnight Saturday under which Lehman Brothers will sell its investment banking and trading businesses to Barclays.
The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman's Midtown Manhattan office tower.
Lehman filed the biggest bankruptcy in U.S. history Monday, after Barclays declined to buy the investment bank in its entirety.
The British bank will take control of Lehman units that employ about 9,000 employees in the U.S.
"Not only is the sale a good match economically, but it will save the jobs of thousands of employees," Lehman lawyer Harvey Miller of Weil, Gotshal & Manges said.
Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays' main reason for acquiring Lehman is to get its people and presence in North America, making widespread layoffs less likely.
"It's unimaginable to me that they can run the business without people," said Lehman's financial adviser, Barry Ridings, of Lazard Ltd.
Barclays had little competition to land the deal.
Miller said that before it filed for bankruptcy, Lehman had negotiated with just one other bidder, Bank of America Corp. BofA instead announced Monday that it would buy Merrill Lynch & Co., saving it from a fate similar to Lehman's. That deal was originally valued at $50 billion.
Miller said that since Lehman filed for bankruptcy, Barclays had been the only buyer to express interest in acquiring even parts of the 158-year-old investment bank.
Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 p.m. Friday and continued well past midnight Saturday.
Lehman lawyers said the value of stock Barclays will buy and liabilities it will assume has fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.
Barclays also said it would buy three additional units -- Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA. The two South American entities are part of Lehman's money management business. Barclays is not paying extra to get the three units.
There was no change to a $250 million goodwill payment and the purchase of two data centers in New Jersey that will go to Barclays, although Barclays may pay less for them. Lehman's investment management business Neuberger Berman was not bought by Barclays.
The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts -- about 130,000 of which are owned by individual investors -- to Barclays accounts.
"The substance of this transaction is to continue a business for the benefit of the economy," Lehman lawyer Miller said in court.
The hearing drew more than 200 lawyers and observers, who spilled into overflow rooms on two floors of the U.S. Bankruptcy Court in Lower Manhattan.
In response to the extraordinary events of the week, the Bush administration announced Friday the biggest proposed government intervention in financial markets since the Great Depression. Some are calling it an "RTC-style bailout" in reference to the government-owned Resolution Trust Corp. that wound down the assets of Savings and Loan Associations, mostly in the 1980s.
"Somehow Lehman Brothers gets left on the sidelines," said Daniel Golden of Akin Gump Strauss Hauer & Feld LLP, who represents clients holding about $9 billion in bonds. "We believe this was a flawed sales process. It benefits Barclays and the federal government but not the creditors of this estate.
"The economic landscape seems to have changed over the last two days," he said. "Yet the debtors and the Fed seem determined that nothing get in the way of this transaction."
Had Lehman filed for Chapter 11 a week later than it had, its fate may have been different.
"This is a tragedy -- maybe we missed the RTC by a week," Miller said.
"That occurred to me, as well," the judge in the case, James Peck, said. "Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets."
www.myfoxny.com
Copyright 2008 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Subscribe to:
Posts (Atom)
Posts
