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8/25/2009

The “Pink Slip” Blues - The Six Things You Should Know

 

According to the Bureau of Labor Statistics, the number of unemployed in July was 9.4%. Since the start of the recession in December of 2007, the number of unemployed people has skyrocketed to 6.7 million. Most economists believe that the recession is coming to an end. Despite this good news, economists believe that the unemployment rate will climb through the first half of 2010. Only then will the employment picture start to improve.

What should you do if you or someone you know is worried about receiving a pink slip? If you have time, start by paying off high interest consumer debt (credit cards) and avoid future debt. Do not make any unnecessary purchases. Hoard your cash. Make sure your emergency fund equals six months of your expenses. Focus on upgrading your skills. Make yourself a more valuable asset to your employer or future employers.

What should you do if you receive that dreaded pink slip?

First - understand that feeling a sense of shock, fear, and even anger are normal human reactions. But, you must not let that hold you back. The best weapon against fear is to take action.

Second – review your severance package. Request a copy of your company’s severance policy before you meet with your boss or the HR Director. Be prepared to negotiate for the best possible package. The best time to negotiate a severance package is at the start of your employment. Live and learn!

Third – file for unemployment benefits. It will take some time to process your claim so file as soon as possible. If you were fired with cause or quit, you will not be entitled to unemployment benefits.

Fourth – review your financial situation. Use a money coach or financial advisor. They can help you evaluate where you are, and whether you should liquidate some of your assets. They will also be able to help you prioritize which assets should be liquidated first, while keeping an eye on the tax ramifications. Your retirement account should be reviewed to determine if you should rollover your 401k assets into your own IRA.

Fifth – continue to develop your skills. Take classes at the local community college and sign up for your industry’s advanced certifications. Consider changing your career path to something more akin to your likes and desires. Consider going it alone. More businesses are created during difficult economic times than in boom times.

Sixth – review your insurance coverage. Go over all your options with your money coach or financial advisor. Look at all types of insurance coverage. Take a hard look at your health insurance. You may be able to bargain for the continuation of employer-paid health insurance for a period of time. A Federal law called COBRA requires that group health plans with 20 or more employees must allow a terminated employee to continue that coverage for 18 months. You may be able to purchase your own policy at a lower rate, so choose carefully. Your children may qualify for the State Children’s Health Insurance Program (SCHIP) which provides health insurance to children whose families earn too much for Medicare. Check your state’s requirements.

Please feel free to pass this on to anyone you feel might benefit. We appreciate all of your referrals.

Posted at 11:48 AM by System Account | Permalink | Email this Post | Comments (0)

7/16/2009

The End of the Great Recession

This has been one of the longest recessions in over 50 years, but it may end this summer. This was the finding of BNA’s mid-year survey of 23 well-known economists. Most Americans won’t recognize the recovery until the middle of 2010. This delay is due to the fact that the unemployment rate will continue to rise through the end of this year and beginning of next year.

The survey indicates that most economists predict that economic growth will be slow throughout 2010. They predict a GDP growth rate of just 2% for next year. At that rate, the economy is unlikely to be able to make any significant gains in employment. They expect the 10-year Treasury bond rate will rise to 4.33%. As rates rise, Treasury bond prices fall.

Other economists disagree. Brian S. Wesbury, Chief Economist and Robert Stein, Senior Economist at First Trust Advisors in Wheaton, Illinois, see a much more robust recovery. They are forecasting a GDP growth rate of 3.5% for the second half of 2009, and 4.5% for 2010. They base their predictions on the following five assumptions.

First - Inventory Levels. While businesses have been selling off current inventories, manufacturing has slowed to a crawl. As inventories get reduced, manufacturing will pick up, although it will not be the same as the pre-recessionary level, but it will be significantly higher than its previous lows.

Second – Trade Deficit. They project continued declines in the trade deficit. As the trade gap narrows, exports add to our GDP.

Third – Housing Market. They expect home building to bottom later this year, and rise in 2010. Housing starts are now only one-third of the long-term trend. Any uptick will add to the GDP.

Fourth - Government Spending. Currently, only about 10% of the $887 billion dollar stimulus package has been spent. The largest portion is scheduled to be spent in 2010, adding to that year’s GDP.

Fifth – Business Investment. Plant and equipment upgrades are expected to turn around much faster than previously thought.

Neither Wesbury nor Stein believes that consumer spending will increase dramatically. They forecast that real consumption will rise only .6% on an annual basis from the end of 2007 to the end of 2010.

Corporate earnings are likely to increase in the next three months, according to the second quarter 2009 Northern Trust Global Advisors survey of investment managers. Thirty-nine percent of participants think corporate earnings will improve in the next three months, compared to only just one percent who felt that way last quarter.

What the economists believe is far less important than what you do for yourself and your family. The economic recovery will be meaningless to you if you are not positioned to take advantage of it. Americans have been shaken by this dramatic downturn. But, Americans have a long tradition of rising to the occasion in times of trouble. We recognize what is truly important, i.e., our loved ones, family and friends. We tighten up our boot straps and move forward. In the end, the American character will be the driving force that pulls us out of this great recession.

Take the time now to review your situation. Look at your personal circumstances, debts, investments, and insurance needs. Determine if you need to make any changes. Your Money Concepts’ financial advisor stands ready to assist you. We will be happy to work with you to help insure all your financial pieces of the puzzle are in the right order.

Please feel free to pass this on to anyone you feel might benefit. We appreciate all of your referrals.

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Posted at 4:43 PM by System Account | Category: Economics; Economic Recovery Campaign | Permalink | Email this Post | Comments (0)
The End of the Great Recession

This has been one of the longest recessions in over 50 years, but it may end this summer. This was the finding of BNA’s mid-year survey of 23 well-known economists. Most Americans won’t recognize the recovery until the middle of 2010. This delay is due to the fact that the unemployment rate will continue to rise through the end of this year and beginning of next year.

The survey indicates that most economists predict that economic growth will be slow throughout 2010. They predict a GDP growth rate of just 2% for next year. At that rate, the economy is unlikely to be able to make any significant gains in employment. They expect the 10-year Treasury bond rate will rise to 4.33%. As rates rise, Treasury bond prices fall.

Other economists disagree. Brian S. Wesbury, Chief Economist and Robert Stein, Senior Economist at First Trust Advisors in Wheaton, Illinois, see a much more robust recovery. They are forecasting a GDP growth rate of 3.5% for the second half of 2009, and 4.5% for 2010. They base their predictions on the following five assumptions.

First - Inventory Levels. While businesses have been selling off current inventories, manufacturing has slowed to a crawl. As inventories get reduced, manufacturing will pick up, although it will not be the same as the pre-recessionary level, but it will be significantly higher than its previous lows.

Second – Trade Deficit. They project continued declines in the trade deficit. As the trade gap narrows, exports add to our GDP.

Third – Housing Market. They expect home building to bottom later this year, and rise in 2010. Housing starts are now only one-third of the long-term trend. Any uptick will add to the GDP.

Fourth - Government Spending. Currently, only about 10% of the $887 billion dollar stimulus package has been spent. The largest portion is scheduled to be spent in 2010, adding to that year’s GDP.

Fifth – Business Investment. Plant and equipment upgrades are expected to turn around much faster than previously thought.

Neither Wesbury nor Stein believes that consumer spending will increase dramatically. They forecast that real consumption will rise only .6% on an annual basis from the end of 2007 to the end of 2010.

Corporate earnings are likely to increase in the next three months, according to the second quarter 2009 Northern Trust Global Advisors survey of investment managers. Thirty-nine percent of participants think corporate earnings will improve in the next three months, compared to only just one percent who felt that way last quarter.

What the economists believe is far less important than what you do for yourself and your family. The economic recovery will be meaningless to you if you are not positioned to take advantage of it. Americans have been shaken by this dramatic downturn. But, Americans have a long tradition of rising to the occasion in times of trouble. We recognize what is truly important, i.e., our loved ones, family and friends. We tighten up our boot straps and move forward. In the end, the American character will be the driving force that pulls us out of this great recession.

Take the time now to review your situation. Look at your personal circumstances, debts, investments, and insurance needs. Determine if you need to make any changes. Your Money Concepts’ financial advisor stands ready to assist you. We will be happy to work with you to help insure all your financial pieces of the puzzle are in the right order.

Please feel free to pass this on to anyone you feel might benefit. We appreciate all of your referrals.

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Posted at 4:43 PM by System Account | Category: Economics; Economic Recovery Campaign | Permalink | Email this Post | Comments (0)

7/14/2009

Nine Ways to Save

Saving is the key to your personal financial recovery. Whether you are a retiree looking for ways to stretch your dollar, or a young family just starting out in life, saving is critical. But what are the best ways to save? We will examine a number of options you can employ on your road to economic recovery.

1. Stop Spending Money. Well, that’s not really practical, but you can substantially reduce your monthly spending by doing one simple thing… leave your credit cards at home. Multiple studies show that we are far more likely to make purchases on a credit card. When using a credit card, we are far more likely to make more purchases and be less concerned about the price we pay. Spending cash hurts. There is something in our brains that does not want to part with cash. That something is missing when it comes to credit cards. Leave the cards at home and your wallet will thank you.

2. Never Buy Retail. With today’s economy, there is no reason to pay full retail. Sales are everywhere. But, just because some item is on sale does not mean you should buy it. Make lists before you go shopping. If an item is not on your list, don’t buy it. Lists have proven to be one of the best tools to keep your spending in check. With large ticket items, make a list of what you will buy this year. Then, wait for deep discount sales. Avoid add-ons which retailers try to tack on to the sale.

3. Pay Yourself First. The single best way to save is by making your monthly savings the first bill you pay every month. It is not fancy, but it works. Decide what you are going to save each month, then make that your top priority. Next, pay your fixed expenses… mortgage/rent, utilities, and food. Then, you can spend anything you have left or increase your savings. Start small, and build. Your goal should be saving 10% to 15% of your salary. Begin at a level that makes sense, and schedule increases systematically in the future, i.e., every six months.

4. Use Two Different Types of Savings. First, set up a “put and take” account. This is an account where you put money in knowing that you will take it out in the near future. Every year, expenses come up that are outside of your monthly budget. Maybe the washer breaks down, or the car needs a new transmission. These things happen. So, part of your monthly savings should be set aside for unforeseen expenses. The second type of savings should be in a “put and keep” account. This account is not to be touched. It is to be left alone to grow for your long-term future.

5. Set Up an Emergency Account. You should have at least 6 months of income in a liquid investment for possible emergencies. The purpose of this fund is to provide for you in the event of disability, job loss, or serious illness. Bank accounts and money market funds are good choices.

6. Pay Down Those Credit Cards. While this may not technically be savings, each dollar of debt you pay off will save you between 18% - 22% interest. Americans have become credit card addicts. We typically own more than 10 cards and carry over $8,000 in debt. This debt adds up to billions of dollars of interest that we are wasting each year. Many people only pay the minimum balance. At that rate, they will be paying off their cards for years and years to come. Set yourself free. Pay off those cards! Start by not using them anymore. Then, pay two, three or four times the minimum payment. The higher the payments, the quicker you will be out of debt and the more interest you will save.

7. Use Tax Advantage Savings. (401ks, 403bs, Company Pension Plans) If your company offers a defined contribution plan (401k), enroll in it. If you are already in your company’s plan, look into increasing your contributions. For 2009, you can contribute up to $16,500 ($22,000 if over age 50). If your company has a matching program, all the better. But if it does not, continue anyway. Every dollar you contribute will lower your taxable wage and, therefore, your tax bill. Meanwhile, the earnings in the 401k are tax deferred. Your goal should be to increase your contributions on a scheduled basis until you hit the maximum. Your retired self will be glad you did.

8. Look into a Roth IRA. If you qualify, a Roth IRA offers unique features. Currently, the annual contribution limit is $5,000 per year ($6,000 if over 50). Contributions are not deductible, but earnings grow tax free. After five years, or age 59½ (whichever is later), you can begin tax-free withdrawals for life. The Roth IRA does not require you to begin withdrawals at age 70 ½ like traditional IRAs. So, if you so choose, you can keep your money in the Roth, earning tax-free returns for your entire life, leaving a larger legacy to your heirs.

9. Check Your Insurance Coverage. We all need insurance. Whether it is to protect our home, car or other personal possessions. We also need to protect our families against the financial loss from the death of a breadwinner or the catastrophic cost of long-term care. While we all need it, we should not be paying more than necessary. Check all of your insurance coverages. Is it enough? Is it too much? Are the costs reasonable compared to the competition? Do an insurance review once a year. It could make a huge difference down the road.

Please feel free to pass this on to anyone you feel might benefit. We appreciate all of your referrals.

Please note: If you should make withdrawals from your IRA or your 401k prior to the age of 59½, you may be subject to taxes and penalties.

Posted at 10:25 AM by System Account | Category: Economic Recovery Campaign | Permalink | Email this Post | Comments (0)
Nine Ways to Save

Saving is the key to your personal financial recovery. Whether you are a retiree looking for ways to stretch your dollar, or a young family just starting out in life, saving is critical. But what are the best ways to save? We will examine a number of options you can employ on your road to economic recovery.

1. Stop Spending Money. Well, that’s not really practical, but you can substantially reduce your monthly spending by doing one simple thing… leave your credit cards at home. Multiple studies show that we are far more likely to make purchases on a credit card. When using a credit card, we are far more likely to make more purchases and be less concerned about the price we pay. Spending cash hurts. There is something in our brains that does not want to part with cash. That something is missing when it comes to credit cards. Leave the cards at home and your wallet will thank you.

2. Never Buy Retail. With today’s economy, there is no reason to pay full retail. Sales are everywhere. But, just because some item is on sale does not mean you should buy it. Make lists before you go shopping. If an item is not on your list, don’t buy it. Lists have proven to be one of the best tools to keep your spending in check. With large ticket items, make a list of what you will buy this year. Then, wait for deep discount sales. Avoid add-ons which retailers try to tack on to the sale.

3. Pay Yourself First. The single best way to save is by making your monthly savings the first bill you pay every month. It is not fancy, but it works. Decide what you are going to save each month, then make that your top priority. Next, pay your fixed expenses… mortgage/rent, utilities, and food. Then, you can spend anything you have left or increase your savings. Start small, and build. Your goal should be saving 10% to 15% of your salary. Begin at a level that makes sense, and schedule increases systematically in the future, i.e., every six months.

4. Use Two Different Types of Savings. First, set up a “put and take” account. This is an account where you put money in knowing that you will take it out in the near future. Every year, expenses come up that are outside of your monthly budget. Maybe the washer breaks down, or the car needs a new transmission. These things happen. So, part of your monthly savings should be set aside for unforeseen expenses. The second type of savings should be in a “put and keep” account. This account is not to be touched. It is to be left alone to grow for your long-term future.

5. Set Up an Emergency Account. You should have at least 6 months of income in a liquid investment for possible emergencies. The purpose of this fund is to provide for you in the event of disability, job loss, or serious illness. Bank accounts and money market funds are good choices.

6. Pay Down Those Credit Cards. While this may not technically be savings, each dollar of debt you pay off will save you between 18% - 22% interest. Americans have become credit card addicts. We typically own more than 10 cards and carry over $8,000 in debt. This debt adds up to billions of dollars of interest that we are wasting each year. Many people only pay the minimum balance. At that rate, they will be paying off their cards for years and years to come. Set yourself free. Pay off those cards! Start by not using them anymore. Then, pay two, three or four times the minimum payment. The higher the payments, the quicker you will be out of debt and the more interest you will save.

7. Use Tax Advantage Savings. (401ks, 403bs, Company Pension Plans) If your company offers a defined contribution plan (401k), enroll in it. If you are already in your company’s plan, look into increasing your contributions. For 2009, you can contribute up to $16,500 ($22,000 if over age 50). If your company has a matching program, all the better. But if it does not, continue anyway. Every dollar you contribute will lower your taxable wage and, therefore, your tax bill. Meanwhile, the earnings in the 401k are tax deferred. Your goal should be to increase your contributions on a scheduled basis until you hit the maximum. Your retired self will be glad you did.

8. Look into a Roth IRA. If you qualify, a Roth IRA offers unique features. Currently, the annual contribution limit is $5,000 per year ($6,000 if over 50). Contributions are not deductible, but earnings grow tax free. After five years, or age 59½ (whichever is later), you can begin tax-free withdrawals for life. The Roth IRA does not require you to begin withdrawals at age 70 ½ like traditional IRAs. So, if you so choose, you can keep your money in the Roth, earning tax-free returns for your entire life, leaving a larger legacy to your heirs.

9. Check Your Insurance Coverage. We all need insurance. Whether it is to protect our home, car or other personal possessions. We also need to protect our families against the financial loss from the death of a breadwinner or the catastrophic cost of long-term care. While we all need it, we should not be paying more than necessary. Check all of your insurance coverages. Is it enough? Is it too much? Are the costs reasonable compared to the competition? Do an insurance review once a year. It could make a huge difference down the road.

Please feel free to pass this on to anyone you feel might benefit. We appreciate all of your referrals.

Please note: If you should make withdrawals from your IRA or your 401k prior to the age of 59½, you may be subject to taxes and penalties.

Posted at 10:25 AM by System Account | Category: Economic Recovery Campaign | Permalink | Email this Post | Comments (0)

7/6/2009

Mid-Year Personal Review

July is the perfect time for a mid-year review of your personal finances and tax outlook. By spending some time now, you can save money later. Let’s take a look at some of the issues you can review.

  • Evaluate Savings: One of the best ways to save is through the various tax advantage savings plans. The most common is the 401k program. Every dollar, up to $16,500 ($22,000 for those over age 50) deposited into a 401k reduces your taxable income, and therefore, your tax bill. If you are not currently participating… START! If you are already participating, make it your goal to increase your contributions over time until you hit the maximum.

  • Evaluate Your Portfolios: How are your assets allocated? Should you consider moving part or all? Now that the dust has settled, it is a great time to review your options. A word of caution… make sure you get a full disclosure of all risks and fees before investing. Review your investment portfolio with your financial advisor before making any decisions.

  • Tax Savings Strategies: Many activities, such as home improvements, may provide tax benefits. The Energy Tax Act offers tax incentives for energy efficient products installed in your home. The benefit allows taxpayers’ credits up to 30% of the cost of the improvements. There is a maximum credit of $1,500 for 2009. Consult your tax advisor for more information.

  • Review Your Withholdings: Many Americans end up owing taxes because they did not have enough withheld during the year. This year will likely be worse than normal. The Make Work Pay Bill provision of the stimulus package automatically lowered withholdings for most taxpayers. The problem is many of those same taxpayers will not be entitled to the $400 (single) or $800 (for couples filing jointly) tax break. If you are one of these individuals, you could find yourself $800 short in your withholdings. Check with your tax advisor for help.

  • Buying a Home: If you are a first-time homebuyer, or if you have not owned a home in the last three years, you can claim a refundable credit of 10% of the purchase price, up to $8,000. This credit applies to homes purchased after December 31, 2008 through December 1, 2009.

  • Buying a New Car: New for 2009, you can claim sales taxes paid on the purchase of a new car. There are also additional credits, up to $7,500 for the purchasing of a hybrid or “plug-in” car. Congress has just passed this so-called, “cash for clunker” bill. Under this legislation, you can turn in a gas guzzling car and receive between $3,500 - $4,500 in tax credits toward the purchase of a high-mileage vehicle. There are a number of requirements that will make it difficult for most Americans to qualify, but if you do, it is a great opportunity.

  • Commit to Getting Organized: Start filing important statements and receipts. Safely store all tax-related documents, financial statements and insurance contracts. If possible, keep an electronic copy of all important documents.

Please feel free to pass this on to anyone you feel might benefit. We appreciate all of your referrals.

Please note: If you should make withdrawals from your 401k prior to the age of 59½, you may be subject to taxes and penalties.

Posted at 9:35 AM by System Account | Category: Economic Recovery Campaign | Permalink | Email this Post | Comments (0)
Mid-Year Personal Review

July is the perfect time for a mid-year review of your personal finances and tax outlook. By spending some time now, you can save money later. Let’s take a look at some of the issues you can review.

  • Evaluate Savings: One of the best ways to save is through the various tax advantage savings plans. The most common is the 401k program. Every dollar, up to $16,500 ($22,000 for those over age 50) deposited into a 401k reduces your taxable income, and therefore, your tax bill. If you are not currently participating… START! If you are already participating, make it your goal to increase your contributions over time until you hit the maximum.

  • Evaluate Your Portfolios: How are your assets allocated? Should you consider moving part or all? Now that the dust has settled, it is a great time to review your options. A word of caution… make sure you get a full disclosure of all risks and fees before investing. Review your investment portfolio with your financial advisor before making any decisions.

  • Tax Savings Strategies: Many activities, such as home improvements, may provide tax benefits. The Energy Tax Act offers tax incentives for energy efficient products installed in your home. The benefit allows taxpayers’ credits up to 30% of the cost of the improvements. There is a maximum credit of $1,500 for 2009. Consult your tax advisor for more information.

  • Review Your Withholdings: Many Americans end up owing taxes because they did not have enough withheld during the year. This year will likely be worse than normal. The Make Work Pay Bill provision of the stimulus package automatically lowered withholdings for most taxpayers. The problem is many of those same taxpayers will not be entitled to the $400 (single) or $800 (for couples filing jointly) tax break. If you are one of these individuals, you could find yourself $800 short in your withholdings. Check with your tax advisor for help.

  • Buying a Home: If you are a first-time homebuyer, or if you have not owned a home in the last three years, you can claim a refundable credit of 10% of the purchase price, up to $8,000. This credit applies to homes purchased after December 31, 2008 through December 1, 2009.

  • Buying a New Car: New for 2009, you can claim sales taxes paid on the purchase of a new car. There are also additional credits, up to $7,500 for the purchasing of a hybrid or “plug-in” car. Congress has just passed this so-called, “cash for clunker” bill. Under this legislation, you can turn in a gas guzzling car and receive between $3,500 - $4,500 in tax credits toward the purchase of a high-mileage vehicle. There are a number of requirements that will make it difficult for most Americans to qualify, but if you do, it is a great opportunity.

  • Commit to Getting Organized: Start filing important statements and receipts. Safely store all tax-related documents, financial statements and insurance contracts. If possible, keep an electronic copy of all important documents.

Please feel free to pass this on to anyone you feel might benefit. We appreciate all of your referrals.

Please note: If you should make withdrawals from your 401k prior to the age of 59½, you may be subject to taxes and penalties.

Posted at 9:35 AM by System Account | Category: Economic Recovery Campaign | Permalink | Email this Post | Comments (0)

6/29/2009

Americans Are Saving More

The American savings rate continues to climb. For the last two decades, the savings rate hovered around zero percent. Now, it has leaped to over 6%. The recession and the credit freeze seem to be the turning point. But, is this change in the savings rate temporary? That is the big question. Economists are concerned that without a spike in consumer spending, the economic recovery will be less robust.

While the overall economy might suffer a bit from a more restrained consumer, your personal economic recovery will benefit from your increased savings. Fifty years ago, the American savings rate was 12%. During the recent economic boom times, more and more people stopped saving and increased their consumer debt. Credit cards became ubiquitous. People refinanced their mortgages, taking equity out of their homes, spending it on consumer products. Businesses too, got caught up in the credit frenzy, over leveraging their books. Now, both individuals and businesses are cutting back.

Americans are going back to basics. They are paying off debt and increasing their savings. Ben Franklin was quoted as saying, “that a penny saved is a penny earned”. That is good, old fashion common sense. We need to save for rainy days. But, Franklin did not live in times with income and social security taxes. In today’s environment, a dollar saved is more like a $1.30 earned. After all, you must first earn $1.30 to net $1.00 after taxes.

Paying off debt is the best action anyone can make. For every dollar of credit card debt you reduce, you save 18% - 20% in interest. It is virtually a guaranteed return on your dollar. Today, Americans are paying down debt at an increasing clip.

These changes in attitude do not seem temporary. A structural change is occurring in our society. Americans are remembering what is really important... family and friends… not possessions. Flamboyant excess is out. The virtue of “all things in moderation” has taken its place.

Does this structural change spell trouble for the economy? If Americans continue to spend less and save more, that will likely slow the economic recovery. But, capitalism needs capital as fuel for long-term growth. Over the last twenty years, American business relied on foreign investments as its capital source. An increased savings rate will mean more “home-grown” capital sources for American business, which, in the long term, will be a positive for economic growth.

In summary, Americans increased saving rate might slow the economic recovery in the short term, but it produces positive benefits for the economy as a whole. But, for your personal economic recovery, increasing your savings and paying off debt will reap nice rewards. Financial advisors generally agree that a 10% savings rate is the benchmark. This rate should increase as you approach retirement. The key to saving is to pay yourself first. Put your monthly savings ahead of all your bills, and then you can spend whatever is left.

Please feel free to pass this on to anyone you feel might benefit. We appreciate all of your referrals.

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Posted at 11:07 AM by System Account | Category: Economic Recovery Campaign | Permalink | Email this Post | Comments (0)
The New Geithner Plan Public-Private Investment Program

On Monday, March 23, 2009, the Treasury Department announced their new program to help struggling banks with their toxic mortgage assets. The first change was in semantics, toxic assets will be, henceforth, called legacy assets. But all kidding aside, this is serious business. Our economic recovery will depend on the stabilization of the housing market, the restructuring of banks, and in getting credit flowing once again to credit worthy businesses and consumers.

The plan has three parts. The first part is run by the Federal Deposit Insurance Corporation (FDIC). It covers troubled mortgages, but not the CDOs… (bundled mortgage securities)… “legacy assets”. These mortgages are three or more months delinquent. The plan offers very favorable financing to private investors to buy these mortgages. The Treasury gave this example: An investor could pay as little as $6.00 for a loan that had an original value of $100.

These bad loans are a problem for banks. It is estimated that there are some $230 billion in loans that are overdue by 90 or more days. By comparison, the “legacy assets” (CDOs or bundled mortgage securities) amount to $1.7 trillion.

The second part of the program will be run by the Federal Reserve. The Fed is expanding existing programs, buying up more of those securitized mortgages. Once again, the plan is to sell those assets to the private sector at favorable financing rates and provide some guarantees.

The third part of the program has to do with commercial mortgage-backed securities and other asset-backed securities that were once rated AAA, but have since been downgraded. The Treasury hopes to sell these assets to five public-private investment funds that will be created through open bidding amongst investment firms.

To finance the plan, the government will put up to $1.00 per $1.00 from private investors, plus finance up to another $5.00 for a 6-1 leverage. The plan allocates $75 to $100 billion from TARP Capital. With favorable financing for investors, the Treasury estimates up to $500 billion in purchasing power will be created by this public-private program. The Treasury has the potential to expand the program up to $1 trillion.

 

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Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Posted at 9:34 AM by System Account | Category: Economic Recovery Campaign; Economics; Public-Private Investment Program | Permalink | Email this Post | Comments (0)
The New Geithner Plan Public-Private Investment Program

On Monday, March 23, 2009, the Treasury Department announced their new program to help struggling banks with their toxic mortgage assets. The first change was in semantics, toxic assets will be, henceforth, called legacy assets. But all kidding aside, this is serious business. Our economic recovery will depend on the stabilization of the housing market, the restructuring of banks, and in getting credit flowing once again to credit worthy businesses and consumers.

The plan has three parts. The first part is run by the Federal Deposit Insurance Corporation (FDIC). It covers troubled mortgages, but not the CDOs… (bundled mortgage securities)… “legacy assets”. These mortgages are three or more months delinquent. The plan offers very favorable financing to private investors to buy these mortgages. The Treasury gave this example: An investor could pay as little as $6.00 for a loan that had an original value of $100.

These bad loans are a problem for banks. It is estimated that there are some $230 billion in loans that are overdue by 90 or more days. By comparison, the “legacy assets” (CDOs or bundled mortgage securities) amount to $1.7 trillion.

The second part of the program will be run by the Federal Reserve. The Fed is expanding existing programs, buying up more of those securitized mortgages. Once again, the plan is to sell those assets to the private sector at favorable financing rates and provide some guarantees.

The third part of the program has to do with commercial mortgage-backed securities and other asset-backed securities that were once rated AAA, but have since been downgraded. The Treasury hopes to sell these assets to five public-private investment funds that will be created through open bidding amongst investment firms.

To finance the plan, the government will put up to $1.00 per $1.00 from private investors, plus finance up to another $5.00 for a 6-1 leverage. The plan allocates $75 to $100 billion from TARP Capital. With favorable financing for investors, the Treasury estimates up to $500 billion in purchasing power will be created by this public-private program. The Treasury has the potential to expand the program up to $1 trillion.

 

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Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Posted at 9:34 AM by System Account | Category: Economic Recovery Campaign; Economics; Public-Private Investment Program | Permalink | Email this Post | Comments (0)
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Ernie Brass
President
Money Concepts Financial Planning Center
440-946-1952
ebrass@moneyconcepts.com

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