PAYING FOR COLLEGE WHILE SAVING FOR RETIREMENT
These two objectives are not mutually exclusive.
It can be done. All across America, families are meeting a mighty financial challenge – the challenge of paying college costs with retirement potentially on the horizon. How do they do it? They go about it consistently; they also get creative.
First, make sure the priorities are in the right order.
Strange as it may sound, your retirement may need to take precedence over your child’s college education.
Think about it. Your son or daughter might qualify for student loans or financial aid. By the time they are 30 or 35, they will have the earnings potential to pay those loans back. Do you see any ads out there for “retirement loans” or “retirement aid”? For most, it is much harder to earn money at age 65 than at age 35. Because of this, many choose to allow the younger generation to assume the debt.
The following are some short-term and long-term ideas you may want to consider if you have college costs on your mind:
Save for college the DCA way.
While dollar-cost averaging is a useful way to build retirement savings, its merit often goes unrecognized when it comes to saving for higher education. If you could put $40 a month even in a basic savings account with a tiny interest rate, over 10 years that is approaching $5,000. That’s nothing to sneeze at, and will certainly help out. Move the money from a checking account each month into a savings account, or …
Consider a tax-advantaged college savings plan.
Contribute to a 529 plan, which features tax-advantaged growth and tax-free withdrawals when the withdrawn funds are used to pay qualified education costs. Not all 529 plans are the same – in fact, some of them will even provide a small cash “match” or “sign-up” bonus when you start your plan. Some 529 plans are even “prepaid” – that means you may be able to secure future tuition rates at current prices, usually at in-state public colleges. Another advantage of the prepaid plans – they are often guaranteed by the state.1,2
Exploit your credit card.
No, don’t pay for college with it … well, at least not directly. Some credit cards give you a cash-back rewards option. You may as well put the rewards toward college. Some of the major banks let you do this and so do online shopping websites such as Upromise.
Keep your income as low as possible in the base income year.
That is the calendar year that starts as your child is in the middle of his or her junior year in high school. That is the year when college financial aid departments start to look at a family’s earned and received income. If you can avoid taking capital gains or a distribution from a 401(k) or 403(b) in that year, that will keep your taxable income low. Will Roth IRA conversions raise eyebrows? Yes, they will.
However, don’t stop contributing to your own retirement savings accounts, and feel free to pay off consumer debts with the money from your savings and checking accounts – the assets in these accounts aren’t used in financial aid formulas.1
Let the college know if your financial situation has changed.
Has the value of your home fallen? Is your business netting you far less than it once did? Financial aid departments should be willing to review these developments and may be able to adjust aid for your student accordingly.
Make it a family affair.
In some cultures, it is common for all members of a family to pitch in on the down payment or mortgage payments for a home. Consider this strategy as your family saves for college. Close friends and family members may be willing (or even excited) to make ongoing contributions to a college savings plan for your child, and/or an annual “birthday” contribution. They may find giving such a gift to be much more meaningful and fulfilling than a mere toy or item of clothing.
In short, hunting for every scholarship or alumni connection you can and finding a great school at a reasonable price – that’s important. But it may be just as useful (if not more) to be both creative and consistent as you save for college. While it has always been a challenge, by putting some thought into it, most families and students can find ways to respond.
Citations
1 – articles.moneycentral.msn.com/CollegeAndFamily/CutCollegeCosts/financial-aid-101-how-to-get-more-cash.aspx [7/16/10]
2 - money.usnews.com/money/blogs/On-Retirement/2010/07/23/how-to-pay-for-college-without-sacrificing-your-retirement [7/23/10]
Monday, July 26, 2010
Friday, July 23, 2010
Chronicle of the Quarter
Anybody looking at the zig-zag course of the stock market can see that the more closely you look, the more you miss what is actually happening. Daily price movements jump around in what appears to be a totally random pattern; up one day, down the next--and it's only when you step back and look at the year or multiple years can you see whether actual money is being made or lost.
But even knowing these things, it's hard not to look at the daily drama of price movements, and listen to the analysts explain how events in Turkey or Sri Lanka are causing investors to feel bullish or bearish. This quarter, I decided to immerse myself in the white noise and see of there are any conclusions one might plausibly draw from the bouncings of the tape. In retrospect, it was a boring three months that managed to give back a little more than the gains of the first quarter. But seem from the perspective of daily price movements, the past three months was a wild ride, full of drama and excitement.
Beginning: Things are looking good; yesterday, the Dow reached its highest point in a year and a half, and last year's 4th quarter showed a 5.6% jump in U.S. GDP. The S&P 500 is up around 1,169.43, following almost a two month rally from rally from 1,056 in early February. Those January Jitters seem to be behind us now; I'm optimistic that the next three months are going to add something to my net worth.
April 1-15: I was right to be optimistic; the Dow is up over 11,000, on (finally!) some good news on the jobs front and encouraging news about housing. And Apple is launching this thing called the iPad, which commentators say is juicing the markets, for some reason... Something called the regional manufacturing index was up 20.2 in April, which sounds bullish. Still plenty of time between now and midnight to start filling out my tax forms...
April 16-30: Maybe I spoke too soon; the rest of the month has been a bumpy ride to nowhere, down Friday, up Tuesday, flat Wednesday and Thursday, up Friday and Monday, down the rest of the week. Consumer sentiment is down. Darn consumers! Also worries that Greece may default on its debt. Darn Greeks! The government is looking into a criminal investigation of Goldman Sachs, which is also apparently spooking the market. Darn government! Yet despite all those annoyingly gloomy consumers and spendthrift Greeks, the markets are still about where they were on the 15th. Maybe the bad news is finally over.
May 1-7: What the hell was that!? Omigod... Omigod... The S&P 500 fell, like, 9% in an HOUR!?! That's the kind of performance you'd expect from something Goldman sold its customers and then shorted for its own profits. Is Goldman behind this somehow? Why isn't the government investigating those bastards? Okay, let's see, calm down. How bad can it get? If I project that hourly return out over the eight years until retirement--Omigod! The portfolio drops below zero sometime late tomorrow afternoon, and the next day I have a negative compounding net worth in, like, total free-fall, and that's 300 trading days a year times eight hourly scary free-fall drops times eight years--oh... Remember to keep breathing... At this rate, I'm going to be something like a hundred billion dollars in the red by the time I retire. And so will everybody else! I wonder who we'll have to write that check to...?
May 10-May 12: What a silly goose I was! Selling my entire portfolio might not have been the best decision of my life, now that the markets seem to have stabilized. The very day I jumped to the sidelines, I watched the biggest one-day gain in more than a year, up 404 points on the Dow, followed by a small decline and then another nice bounce. Sadder but wiser, I get my money back in the market before it can go up too much more without me.
May 13-May 20: Did I say go up? The Dow is back down under 11,000, apparently because the Euro is falling compared with the dollar. I thought a strong dollar was a GOOD thing, but apparently not... Also Germany banned short selling, which spooked American investors. Why? Now the markets are below where they were at the worst of that flash crash thing. Darn Germans! They're just killing my net worth.
May 21-June 7: What the hell? Friday: Market up, financials are healthy. Did the government stop investigating Goldman? Monday: market down because we're all apparently still worried about Greece. I'M not worried about Greece; why is everybody else? I'm just thinking out loud here, but maybe Greece could sell that Acropolis thing to the Germans or Chinese, and if that doesn't pay off the European banks, there's always Rhodes or Crete or something. Tuesday: a lot of see-sawing, but down again. Wednesday, down again on improving economic news, the Dow is down below 10,000 and am I the only investor in the world who thinks that improving economic news is supposed to be GOOD for stocks? The analysts are saying that it didn't improve ENOUGH, or as much as expected, or something. Thursday, back up, which means maybe people realized good economic news is good after all. Also China came to the rescue and said it wasn't going to dump its European bonds on the market. Apparently that Acropolis deal isn't panning out... Friday: another down day, this time with something about Spain defaulting on ITS debts. Whose next? Portugal? Italy? Monday: the Dow is down 1.1% because, get this, BP's "top kill" thing didn't stop the oil flowing into the Gulf of Mexico. Does that affect IBM's business prospects? Or General Electric's? Is Alcoa or Merck less profitable or viable because "top kill" didn't save the shrimp fishermen? Tuesday: up slightly. Wednesday: the Dow is below 10,000. Now we're worried about HUNGARY'S economy. Thursday: A tiny bit of sunshine. Friday: bad. Monday: Awful. Dow at 9,800. Time to get back out?
June 8-June 18: I guess I might have been hyperventilating a little bit the last two weeks; thank goodness the market has finally started that rally that I was expecting way back at the start of April. Has it really been that long? Time moves VERY slowly when you watch the tape every day, but now, at least, I can rest easy. Last Thursday, a bunch of economic reports came in, telling us that the economy is growing--and I'm glad to say that for once the market agreed with me that this was GOOD news. Tuesday was up, Wednesday was down apparently because Ben Bernanke waxed optimistic about the economy (and why is that a bad thing?), Thursday was up nicely and Friday saw an uptick in consumer sentiment. If anybody ever asks me about MY sentiment, I'm going to tell them I'm optimistic as hell even if I'm in a suicidal depression; that number seems to be inexplicably crucial to the health of my portfolio. Friday was down because of Greece, and Monday saw nice gains, including shares of BP. Go figure! Wednesday: flat, thanks to something about Spain not needing a bailout. Thursday: up, thanks to Spain selling some kind of bond issue without incident. Friday: up slightly. For the week: up 2.2%. Why can't every week be like that?
June 19-June 30: Maybe I should just shoot myself. Monday wasn't so bad, but then came down days on Tuesday, Wednesday, Thursday and Friday, as the Federal Reserve downgraded its economic outlook because of all that stuff going on in Europe. Darn Europe! Darn Federal Reserve! Monday was down too, and on Tuesday, the markets hit their lowest level for the year. The Dow is under 10,000, about where it was last November. Why? Get this: China's economic growth is slowing down. Am I the only person who thinks that less economic growth in China could mean more for US? That is how it works, isn't it? Omigod, last day of the quarter; I can't look, except that I have CNBC on all day, and it's just like the month; up and down and finally, in the last couple of hours, down 1.01%.
What an awful week! But it seems like every time I give up hope, the markets bounce back, like a sucker punch in reverse. Maybe I should be giving up hope sooner! Like, right now I'm thinking maybe I should shoot myself and end all this misery. Right after I answer the phone. Hello? Yes. Yes. I'm too busy right now to answer any polling quest--what? What did you say? My sentiment? I'm giddy! Ecstatic! Overjoyed! Yes, I know it's hard to hear the excitement in the tone of my voice, but trust me: optimism is flowing out of every pore in my body! On a scale of 1-100? At least a 104! No, make that 110. Whatever it takes to offset those depressed people you usually call. Yes. You're welcome. Call back any time. I'll be here tomorrow. Yes. Okay. Goodbye.
I can hardly wait to see how THAT plays out in the markets tomorrow morning.
But even knowing these things, it's hard not to look at the daily drama of price movements, and listen to the analysts explain how events in Turkey or Sri Lanka are causing investors to feel bullish or bearish. This quarter, I decided to immerse myself in the white noise and see of there are any conclusions one might plausibly draw from the bouncings of the tape. In retrospect, it was a boring three months that managed to give back a little more than the gains of the first quarter. But seem from the perspective of daily price movements, the past three months was a wild ride, full of drama and excitement.
Beginning: Things are looking good; yesterday, the Dow reached its highest point in a year and a half, and last year's 4th quarter showed a 5.6% jump in U.S. GDP. The S&P 500 is up around 1,169.43, following almost a two month rally from rally from 1,056 in early February. Those January Jitters seem to be behind us now; I'm optimistic that the next three months are going to add something to my net worth.
April 1-15: I was right to be optimistic; the Dow is up over 11,000, on (finally!) some good news on the jobs front and encouraging news about housing. And Apple is launching this thing called the iPad, which commentators say is juicing the markets, for some reason... Something called the regional manufacturing index was up 20.2 in April, which sounds bullish. Still plenty of time between now and midnight to start filling out my tax forms...
April 16-30: Maybe I spoke too soon; the rest of the month has been a bumpy ride to nowhere, down Friday, up Tuesday, flat Wednesday and Thursday, up Friday and Monday, down the rest of the week. Consumer sentiment is down. Darn consumers! Also worries that Greece may default on its debt. Darn Greeks! The government is looking into a criminal investigation of Goldman Sachs, which is also apparently spooking the market. Darn government! Yet despite all those annoyingly gloomy consumers and spendthrift Greeks, the markets are still about where they were on the 15th. Maybe the bad news is finally over.
May 1-7: What the hell was that!? Omigod... Omigod... The S&P 500 fell, like, 9% in an HOUR!?! That's the kind of performance you'd expect from something Goldman sold its customers and then shorted for its own profits. Is Goldman behind this somehow? Why isn't the government investigating those bastards? Okay, let's see, calm down. How bad can it get? If I project that hourly return out over the eight years until retirement--Omigod! The portfolio drops below zero sometime late tomorrow afternoon, and the next day I have a negative compounding net worth in, like, total free-fall, and that's 300 trading days a year times eight hourly scary free-fall drops times eight years--oh... Remember to keep breathing... At this rate, I'm going to be something like a hundred billion dollars in the red by the time I retire. And so will everybody else! I wonder who we'll have to write that check to...?
May 10-May 12: What a silly goose I was! Selling my entire portfolio might not have been the best decision of my life, now that the markets seem to have stabilized. The very day I jumped to the sidelines, I watched the biggest one-day gain in more than a year, up 404 points on the Dow, followed by a small decline and then another nice bounce. Sadder but wiser, I get my money back in the market before it can go up too much more without me.
May 13-May 20: Did I say go up? The Dow is back down under 11,000, apparently because the Euro is falling compared with the dollar. I thought a strong dollar was a GOOD thing, but apparently not... Also Germany banned short selling, which spooked American investors. Why? Now the markets are below where they were at the worst of that flash crash thing. Darn Germans! They're just killing my net worth.
May 21-June 7: What the hell? Friday: Market up, financials are healthy. Did the government stop investigating Goldman? Monday: market down because we're all apparently still worried about Greece. I'M not worried about Greece; why is everybody else? I'm just thinking out loud here, but maybe Greece could sell that Acropolis thing to the Germans or Chinese, and if that doesn't pay off the European banks, there's always Rhodes or Crete or something. Tuesday: a lot of see-sawing, but down again. Wednesday, down again on improving economic news, the Dow is down below 10,000 and am I the only investor in the world who thinks that improving economic news is supposed to be GOOD for stocks? The analysts are saying that it didn't improve ENOUGH, or as much as expected, or something. Thursday, back up, which means maybe people realized good economic news is good after all. Also China came to the rescue and said it wasn't going to dump its European bonds on the market. Apparently that Acropolis deal isn't panning out... Friday: another down day, this time with something about Spain defaulting on ITS debts. Whose next? Portugal? Italy? Monday: the Dow is down 1.1% because, get this, BP's "top kill" thing didn't stop the oil flowing into the Gulf of Mexico. Does that affect IBM's business prospects? Or General Electric's? Is Alcoa or Merck less profitable or viable because "top kill" didn't save the shrimp fishermen? Tuesday: up slightly. Wednesday: the Dow is below 10,000. Now we're worried about HUNGARY'S economy. Thursday: A tiny bit of sunshine. Friday: bad. Monday: Awful. Dow at 9,800. Time to get back out?
June 8-June 18: I guess I might have been hyperventilating a little bit the last two weeks; thank goodness the market has finally started that rally that I was expecting way back at the start of April. Has it really been that long? Time moves VERY slowly when you watch the tape every day, but now, at least, I can rest easy. Last Thursday, a bunch of economic reports came in, telling us that the economy is growing--and I'm glad to say that for once the market agreed with me that this was GOOD news. Tuesday was up, Wednesday was down apparently because Ben Bernanke waxed optimistic about the economy (and why is that a bad thing?), Thursday was up nicely and Friday saw an uptick in consumer sentiment. If anybody ever asks me about MY sentiment, I'm going to tell them I'm optimistic as hell even if I'm in a suicidal depression; that number seems to be inexplicably crucial to the health of my portfolio. Friday was down because of Greece, and Monday saw nice gains, including shares of BP. Go figure! Wednesday: flat, thanks to something about Spain not needing a bailout. Thursday: up, thanks to Spain selling some kind of bond issue without incident. Friday: up slightly. For the week: up 2.2%. Why can't every week be like that?
June 19-June 30: Maybe I should just shoot myself. Monday wasn't so bad, but then came down days on Tuesday, Wednesday, Thursday and Friday, as the Federal Reserve downgraded its economic outlook because of all that stuff going on in Europe. Darn Europe! Darn Federal Reserve! Monday was down too, and on Tuesday, the markets hit their lowest level for the year. The Dow is under 10,000, about where it was last November. Why? Get this: China's economic growth is slowing down. Am I the only person who thinks that less economic growth in China could mean more for US? That is how it works, isn't it? Omigod, last day of the quarter; I can't look, except that I have CNBC on all day, and it's just like the month; up and down and finally, in the last couple of hours, down 1.01%.
What an awful week! But it seems like every time I give up hope, the markets bounce back, like a sucker punch in reverse. Maybe I should be giving up hope sooner! Like, right now I'm thinking maybe I should shoot myself and end all this misery. Right after I answer the phone. Hello? Yes. Yes. I'm too busy right now to answer any polling quest--what? What did you say? My sentiment? I'm giddy! Ecstatic! Overjoyed! Yes, I know it's hard to hear the excitement in the tone of my voice, but trust me: optimism is flowing out of every pore in my body! On a scale of 1-100? At least a 104! No, make that 110. Whatever it takes to offset those depressed people you usually call. Yes. You're welcome. Call back any time. I'll be here tomorrow. Yes. Okay. Goodbye.
I can hardly wait to see how THAT plays out in the markets tomorrow morning.
Wednesday, July 21, 2010
FINANCIAL REFORM ROLLS OUT
Much is hazy about the Dodd-Frank bill, even though it has passed.
Will the goals of the reform bill really be met?
On July 15, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed 60-39 in the Senate. Next week, President Obama is expected to sign it into law.1
"Because of this reform, the American people will never again be asked to foot the bill for Wall Street's mistakes," the President said in mid-July. "There will be no more taxpayer-funded bailouts, period."
Will his words prove true? Some doubt it, while the bill's adherents think this is a great and necessary step to prevent another Wall Street crisis.
However, the step is still being taken - it remains to be seen how the reforms passed will be implemented, and some may be implemented to a lesser degree than intended. (And there is nothing about Fannie Mae or Freddie Mac in the 2,300 pages of legislation.)
Goal 1: No replay of TARP.
In brief, the bill gives federal regulators added power to ward off possible bank collapses. In the near future, these regulators could make too-big-to-fail determinations, set bank capital ratios and ceilings on financial industry CEO compensation, and rule on the types of proprietary investments allowable for banks. The idea is keep financial giants from turning into houses of cards. However, conservatives warn that too much regulation could prompt U.S. financial firms to conduct increasing amounts of business in nations with less-regulated financial markets.2
One of the most vocal opponents of the bill was
House Minority Leader John A. Boehner (R-OH), who likened the legislation to "killing an ant with a nuclear weapon." Boehner thinks that the bill "institutionalizes" the too-big-to-fail notion.1 Other conservatives agree and think that the federal government might keep the bailout option around for big banks when it should be throwing it away.
Goal 2: Consumer education and protection.
The bill creates a Consumer Financial Protection Agency within the Federal Reserve - a new bureau to watch over mortgage lenders, credit card companies and consumer banking practices. The idea is to prevent things like "liar loans" and specious fees. Detractors think the CFPA and its regulations will actually bear a negative byproduct - they think businesses and individuals will have a tougher time getting credit. How big a reach will the CFPA have? How much autonomy will it have? That hasn't been defined.
Goal 3: Transparent derivatives trading.
Most of the trading in the derivatives market happens out of the public eye. No more, according to this reform bill: it will take place on public exchanges, the better to pinpoint systemic risks. Almost everyone applauds this measure.2
Goal 4: Identifying bubbles.
No just stock or commodity bubbles, but also real estate bubbles and bubbles in any economic sector.A new agency, the Financial Stability Oversight Council, will seek to find them. No one knows its regulatory scope yet.2
Goal 5: Double-checking credit ratings.
Why did Wall Street fall in love with derivatives? Didn't the credit ratings agencies warn banks about the peril of such investments? Allegedly not. So an Office of Credit Ratings will be created as part of the Securities & Exchange Commission. The OCR will monitor the big Wall Street credit ratings firms and watch out for possible conflicts of interest affecting ratings.3
Interesting minutiae.
When President Obama signs off on the Dodd-Frank bill, it will kill the Office of Thrift Supervision - that's the office that was supposed to prevent bank collapses. As we can tell by the failure of Washington Mutual and IndyMac, the "supervision" may not have been all that focused. The Office of the Comptroller of the Currency will pick up its duties. (The Dodd-Frank bill also has a nice wrinkle for former IndyMac accountholders: it boosts the FDIC coverage on those accounts to $250,000, retroactive to before IndyMac went bust.)1
Another consequence of the Dodd-Frank bill: all TARP payments will end immediately. And don't look for a new futures market in the offing based on Hollywood box office receipts - the big movie studios wanted to try and make that a reality, but the reform bill won't allow it.1
Citations
1 - latimes.com/business/la-fi-financial-reform-20100716,0,2303004.story [7/16/10]
2 - articles.moneycentral.msn.com/Investing/Extra/what-financial-reform-does-and-does-not-do.aspx [7/15/10]
3 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]
Will the goals of the reform bill really be met?
On July 15, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed 60-39 in the Senate. Next week, President Obama is expected to sign it into law.1
"Because of this reform, the American people will never again be asked to foot the bill for Wall Street's mistakes," the President said in mid-July. "There will be no more taxpayer-funded bailouts, period."
Will his words prove true? Some doubt it, while the bill's adherents think this is a great and necessary step to prevent another Wall Street crisis.
However, the step is still being taken - it remains to be seen how the reforms passed will be implemented, and some may be implemented to a lesser degree than intended. (And there is nothing about Fannie Mae or Freddie Mac in the 2,300 pages of legislation.)
Goal 1: No replay of TARP.
In brief, the bill gives federal regulators added power to ward off possible bank collapses. In the near future, these regulators could make too-big-to-fail determinations, set bank capital ratios and ceilings on financial industry CEO compensation, and rule on the types of proprietary investments allowable for banks. The idea is keep financial giants from turning into houses of cards. However, conservatives warn that too much regulation could prompt U.S. financial firms to conduct increasing amounts of business in nations with less-regulated financial markets.2
One of the most vocal opponents of the bill was
House Minority Leader John A. Boehner (R-OH), who likened the legislation to "killing an ant with a nuclear weapon." Boehner thinks that the bill "institutionalizes" the too-big-to-fail notion.1 Other conservatives agree and think that the federal government might keep the bailout option around for big banks when it should be throwing it away.
Goal 2: Consumer education and protection.
The bill creates a Consumer Financial Protection Agency within the Federal Reserve - a new bureau to watch over mortgage lenders, credit card companies and consumer banking practices. The idea is to prevent things like "liar loans" and specious fees. Detractors think the CFPA and its regulations will actually bear a negative byproduct - they think businesses and individuals will have a tougher time getting credit. How big a reach will the CFPA have? How much autonomy will it have? That hasn't been defined.
Goal 3: Transparent derivatives trading.
Most of the trading in the derivatives market happens out of the public eye. No more, according to this reform bill: it will take place on public exchanges, the better to pinpoint systemic risks. Almost everyone applauds this measure.2
Goal 4: Identifying bubbles.
No just stock or commodity bubbles, but also real estate bubbles and bubbles in any economic sector.A new agency, the Financial Stability Oversight Council, will seek to find them. No one knows its regulatory scope yet.2
Goal 5: Double-checking credit ratings.
Why did Wall Street fall in love with derivatives? Didn't the credit ratings agencies warn banks about the peril of such investments? Allegedly not. So an Office of Credit Ratings will be created as part of the Securities & Exchange Commission. The OCR will monitor the big Wall Street credit ratings firms and watch out for possible conflicts of interest affecting ratings.3
Interesting minutiae.
When President Obama signs off on the Dodd-Frank bill, it will kill the Office of Thrift Supervision - that's the office that was supposed to prevent bank collapses. As we can tell by the failure of Washington Mutual and IndyMac, the "supervision" may not have been all that focused. The Office of the Comptroller of the Currency will pick up its duties. (The Dodd-Frank bill also has a nice wrinkle for former IndyMac accountholders: it boosts the FDIC coverage on those accounts to $250,000, retroactive to before IndyMac went bust.)1
Another consequence of the Dodd-Frank bill: all TARP payments will end immediately. And don't look for a new futures market in the offing based on Hollywood box office receipts - the big movie studios wanted to try and make that a reality, but the reform bill won't allow it.1
Citations
1 - latimes.com/business/la-fi-financial-reform-20100716,0,2303004.story [7/16/10]
2 - articles.moneycentral.msn.com/Investing/Extra/what-financial-reform-does-and-does-not-do.aspx [7/15/10]
3 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]
Thursday, July 1, 2010
FINANCIAL REFORM: THE TABLE IS SET
Next month, President Obama will likely sign a bill into law ordering changes in the ways banks, credit card issuers and mortgage lenders interface with consumers. Here are the key features of the financial reform agreement that the Senate and House of Representatives came to on June 24, with a vote pending.
#1: The Bureau of Consumer Financial Protection. This new consumer agency answering to the Federal Reserve would supervise mortgages, credit cards, student loans and the banks, credit unions and private lenders that issue them. Institutions holding less than $10 million in assets wouldn't be regulated by the BCFP - but they would have to follow its rules. The BCFP would aim to make these products easier to comprehend for consumers and crack down on any possible deceptive practices.1,2
#2: See your credit score for free. If you are turned down for a mortgage or a loan, the new reforms would give you the power to see the credit score supplied to your lender. Right now, you can request three free credit reports each year but you can't see your actual score.1,2
#3: Tougher rules for mortgage lenders. These rules should have come into play years ago, of course, but better late than never. Mortgage lenders would need to verify the assets and income of borrowers, thwarting any surreptitious comeback for "liar loans". Loan officers and mortgage brokers would not be able to receive bonuses for guiding you into this or that loan. Borrowers with ARMs and other types of complex home loans could not be hit with prepayment penalties should they want or need to pay off a mortgage before the end of its term.1,2
#4: Retail minimums for the use of credit cards. Score one for retailers, who don't want to see people make $2 credit card purchases when the swipe fee alone cancels out the revenue. Under the new legislation, stores could set minimums for credit card use. The minimum transaction level could be as high as $10 if a store chooses; the Federal Reserve could raise that $10 limit on the minimum with time.1,2
Alternately, stores could offer consumers discounts if they pay for items with cash or debit cards. (They wouldn't be able to vary the discounts for different debit cards.)2
Additionally, the proposed reforms could allow colleges and universities and the U.S. government to set maximums for credit card transactions.2
#5: Brokers could be held to a fiduciary standard. Under the new reforms, the Securities and Exchange Commission now has the chance to hold brokers to the same fiduciary standard common to financial advisers - that is, investment brokers would have to put a client's best interest first and not simply recommend a "suitable" investment to a client. That new standard may or may not come into play, however; the SEC is undertaking a six-month study to see if such a rule would amount to regulatory overlap or not.3
#6: The "Volcker Rule" would be put into play. This is the rule that would prevent banks from trading with their own money. It would kick in with small concessions. While the reforms would halt most proprietary trading by banks, some limited investment would be permitted - they could provide up to 3% of a fund's equity, and invest up to 3% of Tier 1 capital in hedge or private equity funds.4
The big banks got another key concession from Congress: they don't have to get rid of their swaps-trading desks (some legislators had contended that this decision would drive such trading to foreign markets). They can still be involved in foreign-exchange and interest-rate swaps dealing.5
#7: An Office of Credit Ratings would appear. It would oversee the actions of Moody's, Standard and Poor's and other big names, and one of its objectives would be to flag potential conflicts of interest that could influence ratings judgements.1
#8: The SEC would no longer regulate equity-indexed annuities. The promotion and sale of these annuity contracts has generated much flak in recent years. Interestingly, they would be overseen by state insurance regulators if the reform bill passes, and treated strictly as insurance products.2
Now, what about Fannie Mae and Freddie Mac? Good question. Nothing made it into the final reform bill to address that dilemma. Some analysts expect another bill will emerge in 2011 to propose their restructuring or elimination.5
Citations
1 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]
2 - cnbc.com/id/37921188 [6/25/10]
3 - nytimes.com/2010/06/26/your-money/26money.html?pagewanted=2 [6/26/10]
4 - businessweek.com/news/2010-06-25/banks-dodged-a-bullet-as-congress-dilutes-rules.html [6/25/10]
5 - cnbc.com/id/37927853 [6/25/10]
6 - reuters.com/article/idUSTRE65O1BK20100625 [6/25/10]
#1: The Bureau of Consumer Financial Protection. This new consumer agency answering to the Federal Reserve would supervise mortgages, credit cards, student loans and the banks, credit unions and private lenders that issue them. Institutions holding less than $10 million in assets wouldn't be regulated by the BCFP - but they would have to follow its rules. The BCFP would aim to make these products easier to comprehend for consumers and crack down on any possible deceptive practices.1,2
#2: See your credit score for free. If you are turned down for a mortgage or a loan, the new reforms would give you the power to see the credit score supplied to your lender. Right now, you can request three free credit reports each year but you can't see your actual score.1,2
#3: Tougher rules for mortgage lenders. These rules should have come into play years ago, of course, but better late than never. Mortgage lenders would need to verify the assets and income of borrowers, thwarting any surreptitious comeback for "liar loans". Loan officers and mortgage brokers would not be able to receive bonuses for guiding you into this or that loan. Borrowers with ARMs and other types of complex home loans could not be hit with prepayment penalties should they want or need to pay off a mortgage before the end of its term.1,2
#4: Retail minimums for the use of credit cards. Score one for retailers, who don't want to see people make $2 credit card purchases when the swipe fee alone cancels out the revenue. Under the new legislation, stores could set minimums for credit card use. The minimum transaction level could be as high as $10 if a store chooses; the Federal Reserve could raise that $10 limit on the minimum with time.1,2
Alternately, stores could offer consumers discounts if they pay for items with cash or debit cards. (They wouldn't be able to vary the discounts for different debit cards.)2
Additionally, the proposed reforms could allow colleges and universities and the U.S. government to set maximums for credit card transactions.2
#5: Brokers could be held to a fiduciary standard. Under the new reforms, the Securities and Exchange Commission now has the chance to hold brokers to the same fiduciary standard common to financial advisers - that is, investment brokers would have to put a client's best interest first and not simply recommend a "suitable" investment to a client. That new standard may or may not come into play, however; the SEC is undertaking a six-month study to see if such a rule would amount to regulatory overlap or not.3
#6: The "Volcker Rule" would be put into play. This is the rule that would prevent banks from trading with their own money. It would kick in with small concessions. While the reforms would halt most proprietary trading by banks, some limited investment would be permitted - they could provide up to 3% of a fund's equity, and invest up to 3% of Tier 1 capital in hedge or private equity funds.4
The big banks got another key concession from Congress: they don't have to get rid of their swaps-trading desks (some legislators had contended that this decision would drive such trading to foreign markets). They can still be involved in foreign-exchange and interest-rate swaps dealing.5
#7: An Office of Credit Ratings would appear. It would oversee the actions of Moody's, Standard and Poor's and other big names, and one of its objectives would be to flag potential conflicts of interest that could influence ratings judgements.1
#8: The SEC would no longer regulate equity-indexed annuities. The promotion and sale of these annuity contracts has generated much flak in recent years. Interestingly, they would be overseen by state insurance regulators if the reform bill passes, and treated strictly as insurance products.2
Now, what about Fannie Mae and Freddie Mac? Good question. Nothing made it into the final reform bill to address that dilemma. Some analysts expect another bill will emerge in 2011 to propose their restructuring or elimination.5
Citations
1 -abcnews.go.com/Business/financial-reform-bill-means-big-consumers/story?id=11012343 [6/25/10]
2 - cnbc.com/id/37921188 [6/25/10]
3 - nytimes.com/2010/06/26/your-money/26money.html?pagewanted=2 [6/26/10]
4 - businessweek.com/news/2010-06-25/banks-dodged-a-bullet-as-congress-dilutes-rules.html [6/25/10]
5 - cnbc.com/id/37927853 [6/25/10]
6 - reuters.com/article/idUSTRE65O1BK20100625 [6/25/10]
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