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Personal Finance Blog By MoneyRates - March 2009

Could Swiss Banking Demise Help Our Deficit?

February 27, 2009

By Clark Schultz | Money Rates Columnist

Swiss Banking has been rocked in recent weeks by the large settlement made by Swiss banking giant UBS with the United States government and the prospect that offshore banking may finally be challenged by ongoing concerted efforts by numerous government taxing authorities. The $780 million setttlement UBS made with the IRS includes identifying 250 of their American clients. There are reports that UBS is also being pressured to release the names of an additional 52,000 clients, presumably wealthy Americans who owe money in taxes.

Swiss Banking has a long storied tradition for secrecy which has helped Swiss Banks amass more than $5 trillion in offshore deposits. Swiss Banks ,like UBS based in Zurich, are protected by Swiss law from revealing the names of their customers. In the recent past Swiss Banking lost much its prestige when it was revealed that funds and valuables that Jewish Europeans left in Swiss Banks following Nazi persecution in World War II were kept by Swiss banks in secrecy with no effort made to track down the rightful heirs. Now comes the revelation that Swiss Banks may have done more than accept offshore deposits, that Swiss Bank officials may have been very active in aiding Americans evade taxes.

The good news for the United States Treasury is that a significant amount of dollars may be coming back into the tax coffers. We know that UBS catered to wealthy Americans with net wealth of over $1 million dollars. Assume that each of the 52,000 Americans that UBS allegedly sheltered money have an outstanding tax bill of $300,000. That comes to a quick $15.6 billion owed back to the U.S. right away. Add in the fact that these Americans will now pay income taxes every year on their income, dividends and capital gains. And add in the fact that UBS is just one of the Swiss Banks known to attract wealthy Americans. It may reasonable to assume the United States may have added $100 billion to the Treasury by their recent pressure on Swiss Banks. That is $100 billion less debt to pass on to our grandkids.

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Uncle Sam Offers Huge Credit For First Time Home Buyers

February 26, 2009

| Money Rates Columnist

According to the National Association of Realtors 41 percent of all home buyers are first timers. That's an interesting statistic when you consider that Uncle Sam is now giving away an $8,000 tax credit for new buyers who purchase between now and December 1, 2009.

If this sounds familiar it is, sort of. Last year you might have heard about a $7,500 federal tax "credit" for first-time home buyers, but the deal was more of a cash advance: In basic terms the idea was that a first-time buyer could get a $7,500 credit, money that had to be repaid to the government when the property was sold or at the rate of $500 a year starting in 2010.

This time around the deal is different -- and better. Why? First, you can get a tax credit worth up to $8,000. Second, if you qualify for the program and hold onto the property for three years you don't have to repay the $8,000.

Yup. You can get $8,000 from Uncle Sam. Add in the ability to write off mortgage interest and principal and 2009 will be a very good year, tax-wise, for a lot of people.

How important is this tax credit?

Consider this: How much would you need in the way of a money market account, CD, savings account or IRA to earn $8,000 -- after taxes?

And, here's another biggie: The is a tax credit, not an income deduction. The difference is huge.

Imagine that you can write off $8,000 from your income because of, say, a deduction for mortgage interest. If 25 percent of your income goes to federal taxes you save $2,000.

If you have an $8,000 tax credit then your taxes are reduced by the entire $8,000.

Under the 2009 plan, if your taxes are less than $8,000 you're still ahead because Uncle Sam sends you the difference between your tax bill and $8,000.

You can get more information by looking at the rules and requirements laid out in IRS Form 5405. Also, be sure to check with a tax professional before entering the marketplace.

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Bernanke and the Stock Market

February 24, 2009

By Clark Schultz | Money Rates Columnist

Federal Reserve Chairman Ben Bernanke testifies before Congress this week on the state of the economy. While much of his testimony will be a dry recitation of economic statistics and forecasts, Wall Street has criticized Bernanke for his negative outlook and is hoping he will put a positive spin on the nation's economy. With the Dow Jones Industrial Average is trading near its 1997 level of 7100, traders are grasping at any hope for a market rally. It is possible the right comments from Bernanke can swing the sentiment of investors.

The question is why should Bernanke worry about the effect of his comments on the stock market? He has faced criticism for calling the economy "dismal" and the problems "daunting", but no one disagrees his comments have not been accurate. The economic forecast for 2010 and beyond is for positive economic growth, decreasing unemployment, and price stability - which is all fair game for Bernanke to include in his testimony. But, there is no good reason Bernanke should in his testimony before Congress sugercoat just how bad the next six months to eighteen months will likely be for the U.S. economy. Wall Street will have to outlive the bad news.

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$8 Billion CD Fraud Alleged. What Will You Pay For Risk?

February 24, 2009

| Money Rates Columnist

When you think about certificates of deposit you surely think about safety, but not all CDs are created equally.

That's the lesson to be learned from the SEC allegation that Robert Allen Stanford and three of his companies for orchestrated a "fraudulent, multi-billion dollar investment scheme centering on an $8 billion CD program."

You have to wonder, why would people spend $8 billion on CDs with an alleged fraudmeister when they could have spent $8 billion buying federally-insured CDs from 7,000 small banks?

The answer, of course, is to get higher rates.

I like higher rates but I'm not interested in just higher rates. I'm also interested in risk and in the preservation of capital. If I can get a higher rate with equal risk you have my attention, but if higher rates also mean higher risk then I want to know more.

Long ago someone advised me to purchase a foreign currency. At the time the interest being paid for accounts in that currency were on the order of 20 percent. That sounds great until you realize that the currency was inflating at about 24 percent a year, meaning that you would be losing about 4 percent of your money when the currency was translated back into U.S. dollars.

Oh, and then there was the matter of the local government. Not too stable...or democratic....

Especially at this time, if a CD is not insured by the U.S. government you're taking on a lot of risk. If that's comfortable for you, fine. But at least know that not all CDs are the same.

For more information, see: SEC Charges R. Allen Stanford, Stanford International Bank for Multi-Billion Dollar Investment Scheme

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What If The Banks Are Nationalized?

February 23, 2009

| Money Rates Columnist

During the past week a new discussion has begun to emerge in Washington, the matter of nationalizing banks.

This is a big deal, symbolically and in other ways. If you have a CD, money market account, savings, or IRA you need to keep an eye on this conversation.

As this is written many bank stocks have taken a beating. Citigroup, as one example, closed below $2 a share on Friday. The market cap for the entire company was $10.63 billion. This is a company with more than $2 trillion in assets and deposits of more than $270 billion.

Uncle Sam has tried to create a floor under the banking system by buying tainted assets, guaranteeing securities and purchasing nonvoting preferred stock. The result so far has been both good and bad: The good part is that the financial system has not collapsed. The bad part is that lending remains insufficient and tight credit is slowing down the economy at a time when less economic activity can hardly be seen as helpful.

If you have a federally-insured CD it doesn't really matter if your lender is solvent or not -- the government will make good on the securities and accounts it covers. However, not all accounts and amounts are covered. Use these links for specifics:

FDIC -- Insuring Your Deposits

What SIPC Covers

The problem, of course, is that the government does not protect against all loss. In practice, the protection levels are high enough to cover all losses from most account holders -- but NOT high enough to cover all losses from all account holders. If you're in this second category you need to look carefully at where you keep your money.

What's going on with the Madoff fiasco is a good example: There is protection for some account holders for as much as $500,000. But the account holders who invested with Madoff indirectly may not be covered.

If you want to see a live example of how account protection can work, take a look at the Madoff Trustee site. The SIPC has moved with great speed to figure out who owes what to whom, but this is not going to be an easy process. The latest news reports allege that Mr. Madoff saved a lot of time and effort during the past 13 years by not actually investing any client money, hardly a shrewd strategy given how the market values increased most of that time. As well, there are some 7,000 boxes of documents which need to be sorted.

Looking at the Madoff situation it mow appears that most if not all investors will have losses, some investors will get back at least $500,000 and -- most amazingly -- some investors may be sued to get back money paid to them by Madoff during the past few years, a so-called "claw back."

In everything but name, major banks have already been nationalized. The government is determining dividend policies (1 cent per quarter per share), executive compensation and now loan modification efforts. While all of this has been going on not a dime in covered accounts and in covered amounts has been lost.

As the expression goes, so far, so good....

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