New Rules for Wall Street, Toughest Reform Since Glass-Stegall?
The final language for the financial reform bill has been approved. Big banks that were in deep into things they should not have been deep into during the mortgage boom, are now pretty much handcuffed. Or are they?
I’d love to do a winners + losers piece but it’s too much. No matter how disappointed I might sound, know that this legislation will be a big improvement over the status quo. So, let’s run through some of the main points in this legislation that we small investors care about most:
Derivatives: Banks will have to spin-off “some” of their derivatives business. They can still continue to hedge transactions using mostly financial derivatives. Transactions also now have to go through exchanges and clearinghouses. Sen. Blanche Lincoln’s wanted to bar banks from derivatives trading but clearly that was watered down.
Proprietary Trading: (Volker Rule) Banks can only use a small amount, 3%, of the bank’s money in risky hedge funds or private equity deals.
Consumer Protection Agency: Creates a new Consumer Financial Protection Bureau, housed within the Federal Reserve. The Fed is considered bank-friendly by the way. (Stay tuned, this could still change.) Auto dealers are exempted from oversight by this bureau. In general, this is about mortgages and credit cards. Good that the bill will protect people from predatory lending.
Brokers must now act as fiduciaries. Bill includes a new provision that gives the SEC authority to ensure that brokers act with “fiduciary responsibility” toward their clients. Hurrah! Finally!
Resolution Fund: Money to be used to unwind any big banks that get themselves into trouble.
Congress still has to vote on all of it, but that’s going to happen before you can say… “summer vacation!” When passed, the biggest impact will be the limits on proprietary trading, derivatives reform and the financial watchdog agency for consumers that may still be tweaked. So all together the new rules represent the big changes to our financial system since the Glass-Steagall Act, which was repealed in 1999. In a nutshell, Glass-Steagall was the glass wall that prevented traditional banks from becoming investment banks and investment banks from trying to become depositor based commercial banks. Nobody was confused.
The whole point was to separate the hens from the foxes with a meat cleaver and it worked really well for almost 70 years. Now we’re trying to put Humpty Dumpty back together again and some of the pieces just don’t fit. The thing is over a thousand pages long so you already know that this re-regulation is not going to be terribly effective in the ways we need it the most.
Most of the academics I talk to think the bill falls short and isn’t enough to prevent another banking crisis. Without getting crazy with technicalities, one reason is because big banks will still be able to take really stupid and dangerous risks using other people’s money, and this is what Volker was trying to prevent with his Volker Rule. Commercial banks can still speculate on certain types of high-risk derivatives. Bottom line, there are still plenty of ways for big banks to get into trouble and if history is any indicator – the banks will follow suit.
Oh yeah, then there’s that credit crunch… by restricting the use of derivatives it will get harder to borrow money from banks for the next year or so, but we’re sort of used to that now. My biggest problem with this legislation is that I don’t see it solving the real problem, which is too much alcohol in the punchbowl – meaning leverage. “Too big to fail” didn’t really seem to get addressed either since big banks that get into trouble can always go to the Fed and ask for money. And FANNIE who? Where are Fannie Mae and Freddie Mac in all those 2,000 pages? Looks like when this gets signed, Wall Street mega-firms will be crying all the way to the bank, but look closely because I doubt you’ll see any real tears.
Start talkin’ money with your family
A couple of surveys caught my eye this week – one having to do with high school graduates not really understanding much about money or feel confident about managing their own money. We know teens are really good at spending it though! So lots of work to be done by parents and teachers on the simple lessons about the simple things including how to create a budget,use a checking account and debit card and the all-important credit card talk. Even if parents don’t feel they have done the best job of handling their own personal finances, what they tell their own kids will have a bigger impact on how their kids handle their money than anyone else. That’s a fact. I’m the spokesperson for the California Jump$tart Coalition and that fact always surprises people.
Now, speaking of families…on the other end of the spectrum are us adult kids who have an aging parent. Well, the a brand new survey just released this week points out a pretty startling fact – that almost half of adult kids realize and are worried about our parent’s ability to make big financial decisions. Yet at the same time, just like parents don’t really like to bring up the money conversation, we grow up believing it is rude to talk to our own parents about their finances. But somebody else is talking to them! Remember back in season one, we had this story about a retired couple living in Pennsylvania. They’re over 70. He’s a retired architect. She was a homemaker. They got ripped off and scammed into some non-existent investment by their own CPA! And the CPA was a trusted friend! Well, what I didn’t tell you in the piece you saw on TV was that their own grown son who lived not far away, is a registered financial advisor! But Ruth didn’t want to “burden” her son with their personal financial questions so instead, they were systematically robbed of their entire life savings but the scumbag CPA. Tough lesson learned. What’s the moral of the story? Drop the old belief that you shouldn’t discuss money, bills, and investments with your own kids or your parents and start talking money!
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Is the stock market ride worth the risk?
The stock market’s been nothing short of wild carnival ride over the past few months but it’s more than just the volatility, everyday investors are just plain sick of digesting the frightening news – whether it’s bad behavior on Wall Street, the housing market, European crisis that started in Greece, the flash crash, ordinary investors just want to know, will the market go up or down? Answer is: yes.
- The market will go up AND down and now is a good time to be asking these questions. The overall stock market has lost a little more than 10% just in the past month but oh wait, today the market rallied and The S&P 500 posted its biggest weekly gain since March! Chances are good that your 401k and investments are in the same boat as mine.
- So why bother with the stock market at all? – Under the mattress might sound good and you might sleep better, until you realize that unless your money is invested someplace where it stands to grow over time – it will be eaten away little by little by inflation. In normal times inflation runs about 3% a year. At that rate, years go by and you’d find very little of your cash left under the mattress. We have to keep that savings growing more than 3% a year to avoid that monster.
- Once we acknowledge that there are risks with investing, and risks from not investing, then we seek out the best possible time-tested ways to invest. What really works? The stock market has historically been by far the best choice – in combination with some real estate. Many readers are wondering what the long-term performance of the stock market has been. Throughout stock market history, the average yearly return for periods of 25 years or longer has been around 9-10% Typical returns on real estate holdings over the same periods have averaged 3-6%. Some highly regarded experts believe holding onto stocks longer reduces the risk at all. Me, I believe for a host of reasons it is reasonable to expect at least a 6% growth rate going forward. While no one – and I mean no one knows when the stock market will go up and down, there are proven ways to reduce the overall risk and create your own lifeboat to help ride out the storm. Here are three key things to do:
1. Divide up your money – all of it.
Separate your money into three totally different catagories, do this both mentally and physically –
Today money
at-the-ready money emergency money – cash you need from checking to spend to cover bills et al., the money you use to pay your mortgage or rent. You are going to use this money so there’s no risk of inflation.
Risk level = none.
Savings pot for specific events
You cannot afford to let your savings sit in a low interest checking account – needs to be invested for specific purposes such as down payment on a house and college savings. Investments that have a specific deadline. There is some degree of risk you can afford to take with this money. Goal is to stay ahead of inflation.
Risk = medium
Your longest term investment money
This is your retirement money and needs to be invested in the scary ocean called the stock market, over the decades you build these savings into what’s going to become your nest egg! This includes all your 401k, your ira investments,
Risk = highest
The most serious money has the biggest risk but you can seriously reduce that risk!
* Invest only a little money at a time into your stock market investments over your entire working career. That way you are protected from the risk of buying when stock prices are at their highest point.
* Make absolutely sure the money you’ve committed to the stock market is truly diversified. Diversification really reduces your risk of having too much exposure to any one area of the market.
By taking this simple time-tested approach you avoid the biggest risks of investment. To make sure you are really diversified to weather the storms, you can sit down with a fee-based financial advisor and get a portfolio check up. Then you can be sure your money can grow and you can sleep well at night!
Retirement in the 21st century
This ain’t your daddy’s retirement
I read a headline last week: 1 in every 4 workers surveyed (in the last year) say they are planning to delay retirement. This got me thinking, if I’m going to live (God willing) in good health until I’m 90+ years old, what’s so bad about staying active and working until I’m … 70? It made me think of what Jon Pond said here on MoneyTrack. This really stuck with me: If you can delay your retirement an extra three years, you will increase your retirement income by 25%! Work an extra five years, (even part time and continue making some contributions to your IRA) and you can increase your retirement income 40%. If you put off touching your money six years, your can have as much as 80% more to spend a year. It’s like the physics of money, thanks to compound interest, your savings at that point is like a big snowball rolling downhill! Don’t get in the way!
Say you have a half a million dollars total in your 401k, IRA’s and savings and your 65 today. That’s enough to provide you a yearly income of about $22k a year, assuming you withdraw 4% from your nest egg every year. But if you choose to continue working – even part time and you don’t touch your savings for another six years, your income at that point will be more like $45k. Working after age 70 doesn’t mean you have to put in an 8-hour day and never take any vacations. You could actually spend time doing something you love!
The recession/correction has us all thinking about when we can realistically retire and retirement is expensive. Here are THREE key things that you need to do in order to retire comfortably:
1. You need to have a plan – no matter what your age, and understand that each person’s retirement plan is unique and specific, without interrupting the contributions!
2. Your plan is a living, breathing document that morphs as your life changes. You need to revisit the plan whenever you change your lifestyle as in getting married, having kids, buying a new home, etc.
3. Now, I just told you that everybody’s retirement map will be unique and specific but opting to delay spending retirement funds will greatly increase the odds that you’ll be able to relax and travel without outliving your savings.
We all know people in our lives who have reinvented themselves beyond the”mandatory” retirement age of 65. Remember, Ronald Reagan was 69 years old when he became the 40th President of the United States!
