On the plane ride to speak at my last convention I overheard two farmers talking. One farmer was speaking about how his prized bull was going to service his prized cow; then I realized what service was. Your stock broker has been servicing you for years. So have the phone company, your internet provider, and the government. How about waking up and doing something about it, because now, the government is really giving you big-time service and your children and grandchildren are going to pay for it.
As the economy continues to worsen, people resume losing their savings and their houses, and most people are burying their heads in the sand. The administration will destroy your children’s future. Think we pay high taxes now? Who do you think is going to pay for all of these bailouts; it won’t be the people on welfare, the unemployed, or the illegal aliens. It will be people like you and I that work for a living and pay taxes.
Think things are going to get better? Well think again. Even though my clients all made money in 2008, I have not heard that statement from too many other people. So, what are you going to do? Listen to your incompetent stockbroker, your tax collector accountant, or your life insurance financial planner who helped you get into this situation?
While there are signs that some of the principal indicators have stabilized to some degree, but it’s at a minuscule level, and we’re not seeing corporate investment starting to pick up or consumers starting to spend again. To put it in simple terms, the traditional methods by which economies generally come out of a recession are lacking at this time.
This being said, hopes that the American economy, which led the world into recession, might lead it back out this year, have been diminishing quickly.
In March, Warren E. Buffett, wrote in his company’s annual report that the economy will be in shambles throughout 2009, and most likely, well beyond. As if to highlight the problems, the Institute for Supply Management also reported that companies in the US said business was getting much worse, particularly regarding jobs. The February employment report showed a decline of 785,000 jobs, which made it one of the largest one-month declines in employment in virtually 60 years.
Throughout February, the US revised its estimate of fourth quarter gross domestic product to show a decline at an annual rate of 6.2 percent, the worst in more than a quarter century.
The continued plunge of the stock market and economy has shocked investors and governments. If this is so, then why did the federal government just rescue the A.I.G. for the fourth time in six months, and why was the government willing to spend $30 billion more of taxpayers’ money for very little return. The government, which owns nearly 80 percent of A.I.G., did not take more equity in A.I.G., and also converted its preferred shares, which paid a 10 percent dividend, into shares that don’t pay a dividend at all.
One of the biggest worries relating to this, besides the considerable collateral damage to the banking system, is a risk that most people don’t know about. In the United States, A.I.G. has more than 375 million policies with a face value of $19 trillion and if policyholders lost faith in A.I.G. and rushed withdraw cash from their policies all at once, the entire insurance industry could falter; this could lead to a systemic risk, which is a phrase often used to describe the domino effect of one business’s failure on the rest of the economy. See the Bisk Education CPA’s Guide to Life Insurance by Lance Wallach. A ‘run on the bank’ in the life and retirement business would have sweeping impacts across the economy in the US.
Even though A.I.G.’s insurance business is regulated by states, there probably would not be enough money to pay out to consumers from what’s known as a guarantee fund. Other regulated insurance companies, which have been weakened by credit losses, would be required to pay money into the fund to cover the shortfall, weakening them further and in some cases bankrupting them.
Some people would have to sell more of the bonds in their portfolios to honor their obligations to the scared-off-policyholders, which would freeze up the bond markets again, because life insurance companies to a very great extent are the bond markets. They buy more corporate debt than any other institutions.
Given the number of states in which A.I.G. issued large numbers of policies, the net effect may be regulatory gridlock and high administrative expenses, delaying payment and decreasing the funds available to pay claims.
What’s worse is if A.I.G. failed, many people would be unable to obtain the same insurance from a competitor for the same price. In fact, many people would probably be shut out. Some life-policy holders may no longer be insurable at commensurate rates or as a result of adverse health situations since the purchase of the original policy.
Another issue disappointing investors is the dividend cuts that many companies have been forced to make. On March 2, the large regional bank PNC Financial Services Group cut its dividend 85 percent and the International Paper Company cut its dividend by 90 percent. Last week, General Electric cut its dividend by 87 percent.
For now, at least, few investors expect any such good news. Over the six months that ended last week, the S.&P. 500 lost 43 percent of its value. There were comparable declines during the Great Depression, but since then, the worst six-month performance before the current plunge was a 32 percent fall in 1974 when the world was also in recession. The S.&P. 500 fell 18.6 percent in the first two months of 2009, even before Monday’s fall. That was its worst start, exceeding the 18.2 percent fall recorded in the first two months of 1933, yet another year when a new president took office during an economic and financial crisis. In 1933, the stock market soon turned and nearly doubled over 12 months.
The S.&P. 500 has now fallen below, and the Dow is close to, the levels that existed on Dec. 5, 1996, when Alan Greenspan, then the chairman of the Federal Reserve, inquired in a speech, “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”
It was a question that has undoubtedly been answered over the past 17 months. During that period of time, the Dow has fallen 52.3 percent, a greater percentage decline than in any bear market since the Great Depression, but nowhere near the 89 percent collapse that took less than three years to complete after the 1929 high.
While there has been speculation about international cooperation to deal with the growing financial and economic crisis, the European Union summit this weekend provided an indication that a small number of countries were prepared to risk their own taxpayers’ money to help others, so why are we?
Investors have greeted the stimulus spending plans with a quantity of uncertainty because of signs that the financial system continues to weaken.
These tribulations are just a few of the hundreds of problems that the government is not telling you about, which is why it is vital for you to seek helpful and knowledgeable advice.
So what are you waiting for? Visit www.FinanceExperts.org, www.TaxLibrary.us, www.IRS.gov, and www.Vebaplan.com for more information like this; take your head out of the sand and do something before it’s too late.
Lance Wallach, the National Society of Accountants Speaker of the Year, speaks and writes extensively about retirement plans, Circular 230 problems and tax reduction strategies. He speaks at more than 40 conventions annually, writes for over 50 publications and has written numerous best-selling AICPA books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Business Hot Spots. Contact him at 516.938.5007 or visit www.vebaplan.com.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
