Posts Tagged ‘financial meltdown’

Who Wants To Be a Millionaire?

Tuesday, July 10th, 2012

Wobbly economies that shook up markets in 2011 took their toll on the world’s rich, though fast-growing Asia for the first time had more millionaires than North America.  According to the report, the global personal wealth of people worth $1 million declined in 2011 for the second time in four years, a side effect of the Eurozone crisis and economic sluggishness in developed markets.  Several emerging markets also suffered, with the number of millionaires in India and Hong Kong falling by nearly 20 percent.  With Europe’s debt crisis bedeviling the continent, the outlook for wealth creation in 2012 remains weak, according to a report prepared by Capgemini and RBC Wealth Management.

The world’s millionaires grew by 0.8 percent to a record 11 million, according to the report, yet their collective wealth fell by 1.7 percent to $42 trillion.  Only the Middle East experienced no decline in wealth.  It was the first global decline in millionaire wealth since the 2008 financial crisis, when the ranks of the wealthy fell 15 percent and their wealth declined by 20 percent.

Families worth $30 million or more saw their collective wealth fall 4.9 percent and their ranks shrink by 2.5 percent to just 100,000 individuals.  This decline reflects holdings in higher-risk and less liquid investments like hedge funds, private equity and real estate.

“It was a challenging environment for our clients,” George Lewis, global head of wealth management at Royal Bank of Canada, said.  The Toronto banking giant began sponsoring the widely watched report in May.  Lewis pointed out that the number of high net worth individuals rose even as overall wealth fell.  “It at least suggests there continues to be upward mobility and the ability to generate wealth around the world,” he said.

Curious about how many millionaires live in nations around the world?  Read this:  Singapore toppled Hong Kong as home to Asia’s wealthiest in 2011 as declining stock markets hit the former British territory significantly harder than its Southeast Asian rival.  Hong Kong, whose stock market capitalization fell by 16.7 percent last year, saw a bigger decline in the ranks of people with more than $1 million to invest as a larger proportion of that wealth was tied up in equity.  Southeast Asia also has shown stronger signs of resilience to global turmoil than the rest of Asia as domestic spending offset struggling exports.  The number of millionaires in Hong Kong fell 17.4 percent to 83,600 last year, compared with a decline of 7.8 percent to 91,200 people in Singapore, according to RBC Wealth’s head of emerging markets Barend Janssens.  Hong Kong took the lead from Singapore in 2010 after falling behind in 2008.

China still is home to the most high net worth individuals in Asia Pacific, with a population of 562,000 millionaires.  The top five countries by population of high net worth individuals are the US (3.07 million), Japan (1.82 million), Germany (951,000), China and the United Kingdom (441,000).  According to RBC, this significant concentration of high net worth individuals is why wealth managers are attracted to Asia even if they have to contend with competition from domestic banks.

Are the troubles in the Eurozone likely to impact Asia?  Lessons learned from the 2008 financial meltdown show that while Asia tends to get hit when the world economy stumbles, the severity varies depending on which countries have the biggest trade and financial linkages, and are best-prepared with big currency reserves, overflowing government coffers and central banks with the ability to cut interest rates.  Generally speaking, Asia has more room than the West to react with interest-rate cuts and government spending.  But some things have changed since 2008, and some countries, primarily India, Vietnam and Japan, may not be in shape to survive another financial jolt.  “As we saw with Lehman, when you get a seizure in the global financial system, nobody can hide from that in the short run,” said Richard Jerram, chief economist at the Bank of Singapore.  In that type scenario — which analysts say could still occur if Greece doesn’t live up to its commitments and leaves the Euro, or Spain and Italy require a bailout that Europe can’t afford — Asian stocks and currencies would fall, shipping lanes would see less business, and lending to consumers and businesses would dry up, slowing world economies.

Boomers Planning on Taking It With Them

Tuesday, September 27th, 2011

A new study  has found that many baby boomers plan to spend their money on themselves and forego giving their offspring any inheritance.  “My goal is when they carry me away in that box that my bank account is going to say zero,” said Carol Willison, a 60-year-old Seattle woman.  “I’m going to spoil myself now.”  Upsetting the conventional idea of parents carefully tending their financial estates to be passed down once their wills are read, many baby boomers plan to spend the money on themselves while they still can.

In a survey of millionaire boomers by investment firm U.S. Trust, only 49 percent said it was important to leave money to their children.  The low rate surprised a company that for decades has advised well-heeled people about how to leave money to their heirs.  “We were like ‘wow,'” said Keith Banks, U.S. Trust president.

The decision to leave an inheritance is increasingly faced by many of the nation’s 77 million baby boomers, and it’s becoming all the more complicated because of the difficult economy.  Boomers face the decision of wanting to enjoy their long-awaited golden years and the pressure of various financial concerns, such as fear of outliving their savings and the need to help parents, children or siblings who have money struggles of their own.

“I do not see my baby boomer clients giving up a vacation or wine or dinners out so that they can leave more money to their children, because they feel like they’ve already done it for their kids,” said Susan Colpitts, Executive Vice President of a Norfolk, VA wealth management firm.  “They say, ‘If there’s something at the end I’d love (the kids) to have it, but what’s important for me now is to get what I’ve earned, which is to travel and have a nice bottle of wine,'” Colpitts said.

“How can you say no when a child asks ask for a down payment for a house or money to remodel their house to have a bedroom for a second child?” asks Ken Dychtwald, chief executive of the research firm Age Wave.  “A lot of boomers are finding that family members are taking cash advances on those inheritances right now.” 

Writing on the Encore blog about retirement planning,  Missy Sullivan says that “The survey found that three-quarters of respondents believe their wealth came from their own focus and hard work, while half said they paid a steep personal price — limiting time off, neglecting their families, mishandling relationships.  Maybe that’s why, as they approach retirement, they’re planning to spend more on themselves, traveling (64 percent) and having fun (36 percent).  Boomers surveyed also had doubts about their kids’ readiness to handle the family riches.  Only 31 percent of parents agree strongly that their children can handle an inheritance.  Only 36 percent believe the kids can work together to make decisions about the family wealth after they’re gone.  Fifteen percent have disclosed zilch to the kids, detail-wise, about their wealth.  When asked why, the reasons included fear the kids would become lazy (24 percent), would make poor decisions (20 percent) or would squander the money (20 percent).” 

The size of parental estates can be significant  — a median of $64,000, according to a report from the Center for Retirement Research at Boston College and MetLife insurance.  That’s a handsome amount, but hardly the life-changing Lotto win that will send boomers on a big shopping spree.  “We ran all the numbers, and it’s really unlikely that boomers will inherit an unimaginably large amount of money,” said Anthony Webb, a research economist with the retirement center.

The fact remains that many Boomers inherited less from their parents, thanks in part to the recent financial meltdown.  Boomers who have already inherited an estimated $2.4 trillion avoided much of the market declines.  If investors didn’t have to take their cash out of the market, the investment hit most estates took during the recession has nearly all been recovered.  Nevertheless, the Center for Retirement Research estimated that the $6 trillion originally coming due to boomers had been cut to $5.2 trillion, creating an $800 billion loss.  Additionally, that 13 percent estimated loss in investment wealth, the major factor dragging down boomer inheritances, is the drop in housing prices.  “Real estate took a huge cut, whereas investments have largely recovered for many people,” says Warren McIntyre, a certified financial planner with Troy’s VisionQuest Financial Planning.

According to Marilyn Capelli Dimitroff of Capelli Financial Services, “Once the parents are gone, the kids can’t sell the house.  I’ve had conversations with clients where they just don’t know what to do.  The houses are on the market and on the market, and sometimes the kids live out of state and the houses just deteriorate.  I actually had one family try to give away the home, and they couldn’t do it.”

TARP’s Ultimate Tally Could Be Just $25 Billion

Thursday, December 16th, 2010

TARP’s Ultimate Tally Could Be Just $25 BillionThe estimated cost of the Troubled Asset Relief Program (TARP) keeps falling, according to the nonpartisan Congressional Budget Office (CBO).   The latest estimate is that TARP will cost the taxpayers just $25 billion – significantly less than the $700 billion allocated for the financial bailout in the fall of 2008.  The CBO’s last estimate – made in August – was that TARP would add up to a $66 billion loss, so the newest numbers represent a significant improvement.

This optimistic prediction is thanks to funds returned to the Treasury Department as banks repaid their loans and bought back stock warrants.  Another factor in the revised numbers is that less money than anticipated went to bailing out AIG and General Motors, the latter of which recently had an extremely successful initial public offering.  “Clearly, it was not apparent when the TARP was created two years ago that the cost would turn out to be this low,” according to the CBO.  “At the time, the U.S. financial system was in a precarious position, and the transactions envisioned and ultimately undertaken through the TARP engendered substantial financial risk for the federal government.”

TARP was originally created so the government could buy toxic mortgage-backed securities from big banks.  Former Treasury Secretary Henry M. Paulson ultimately altered the program to infuse cash into banks and other companies that were likely to fail.  The majority of banks have repaid their loans; in fact, the federal government has made approximately $12 billion from those transactions.  Because the financial system was stabilized more quickly than originally anticipated, only $433 billion of the TARP fund was spent, which reduced the potential for losses, according to the CBO.  President Barack Obama and Treasury Secretary Timothy Geithner have hailed the revised projection as a sign that the extremely unpopular program was effective and not the corporate giveaway as some opponents have accused.

Global Financial Reform Hits a Roadblock

Wednesday, October 20th, 2010

Global financial reform efforts stalemated.  Two years after the global financial meltdown and collapse of Lehman Brothers, world leaders seem to have reached an impasse over crucial proposals designed to prevent the same devastating scenario from occurring in the future.  The stalemate is so serious that there may be little chance that needed changes will be made. Executives at the World Bank and the International Monetary Fund (IMF) are disappointed with the slow movement and analysts warn that national interests could undercut badly needed real reforms.  Tension over currency rates is growing, and there is an increasing sense that major financial centers will create significantly different rules impacting their nation’s financial firms.  United States Treasury Secretary Timothy Geithner prefers a more unified approach to financial reform.

“Urgent action is needed to arrest the disturbing trend toward unilateral moves,” wrote Institute of International Finance managing director Charles H. Dallara in a letter to IMF officials.  The IMF fears that the global overhaul does not fulfill its promise to insulate the world from a repeat of the financial crisis.  “The more we continue with the present system, the more likely we are to have a relapse,” said Jos Vials, the IMF’s financial counselor and head of its capital markets department.  “Unless we deal with these problems, we will not have a safer system.”

The major points of contention relate to identifying and regulating firms considered to be too big to fail and how to create a system for some companies to collapse without requiring government bailouts.  The IMF’s financial experts believe that companies must be allowed to fail so they do not pursue risky strategies in the confidence that the government will rescue them if they get into trouble.  The only way to create effective regulations is to retain the idea of a moral hazard.

Basel III Tightens Global Banking Standards

Tuesday, September 28th, 2010

 Basel III agreement is designed to prevent future financial meltdowns.Global banking regulators have agreed to implement new rules that will make the international banking industry safer and avoid future financial meltdowns. Known as Basel III — after the Swiss city in which the agreement was worked out — the new requirements will more than triple the amount of capital that banks must have in reserves.  This will oblige banks to be more conservative and compel them to maintain larger hedges against potential losses.

The heart of the agreement is a requirement that banks raise the amount of common equity they hold – perceived as the least risky form of capital – to seven percent of assets from just two percent.  Banks are concerned that the tough new regulations will reduce profits, harm weaker institutions and increase the cost of borrowing money.  To allay their concerns, regulators are giving the banks as long as 10 years to implement the toughest rules.  Jean-Claude Trichet, president of the European Central Bank, said “The agreements reached today are a fundamental strengthening of global capital standards.”  Representatives from 27 nations, who are members of the Basel Committee on Banking Supervision, participated.  The committee’s recommendations are subject to approval in November by G-20 nations, including the United States.  A deadline of January 1, 2013, was set to start phasing in the revised regulations.

Mary Frances Monroe, vice president for regulatory policy at the American Bankers Association – which represents the nation’s 8,000 banks – was happy with the results.  “Banks understand the need for heightened prudential standards,” she said.  The United States’ top banking regulators – the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency – issued a statement saying the agreement “represents a significant step forward in reducing the incidence and severity of future financial crises.”

Senate, House Versions of Financial Reform Bill Headed to Reconciliation

Monday, June 7th, 2010

Senate passes financial reform legislation; the bill now must be reconciled with the House version.  Senator Christopher Dodd (D-CT) is enjoying a big victory in his last days in the Senate following passage of broad financial reform legislation designed to rein in the excesses that caused the financial meltdown.  First, the Senate and House versions of the bill must undergo reconciliation.  Under the new law, for example, homebuyers will have to provide proof of income when applying for a mortgage.  Additionally, a new consumer protection apparatus will monitor lenders who offer subprime loans and then raise interest rates to sky-high levels.

The legislation – which will bring openness to complex financial instruments such as derivatives – passed 59 – 31 and provides a way to liquidate financial institutions once viewed as too big to fail.  It also establishes a council of regulators who will monitor threats to the economy and specific restraints on the derivatives trading, which set off the toxic debts that froze the credit markets and prompted the Federal Reserve to make trillions of dollars of loans to banks on the brink of collapse.

The vote hands President Obama his second landmark legislative victory this year, following the March passage of his historic health-care bill. “Our goal is not to punish the banks,” he said hours before the final vote, “but to protect the larger economy and the American people from the kind of upheavals that we’ve seen in the past few years.”

Senate Majority Leader Harry Reid (D-NV) summed up the legislation: “When this bill becomes law, the joyride on Wall Street will come to a screeching halt.”  The reconciled bill is expected to hit President Obama’s desk for his promised signature this summer.

The Canary in the Mine Shaft

Thursday, March 25th, 2010

Brooksley Born predicted market collapse and financial meltdown and nobody listened.  A decade before the financial meltdown, one woman was sounding the alarm that a catastrophe was coming.  That woman is Brooksley Born, who correctly predicted that investments known as over-the-counter derivatives could cause a financial crisis.  As Chairman of the Commodity Futures Trading Commission (CFTC) during the second Clinton administration, Born would wake up “in a cold sweat” fearing that derivatives like credit-default swaps might cause the economy to implode.

Ultimately, Born’s worst fears became reality despite the fact that former Federal Reserve chairman Alan Greenspan had dismissed her concerns.  According to Born, Greenspan “explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him.”  The comment made no sense to Born, a Stanford-educated lawyer who had spent most of the 1980s defending clients enmeshed in a conspiracy perpetrated by Nelson and William Hunt, the wealthy Texas brothers who had duped investors while trying to control the world silver market.

The CFTC was established in the 1970s, primarily to regulate futures contracts bought by farmers as a hedge against price fluctuations.  By the time Born took the CFTC’s helm in 1996, the futures market had grown more sophisticated.  Born believed that the mostly unregulated “dark markets” were showing signs of trouble.  “I was very concerned about the dark nature of these markets,” Born said.  “I didn’t think we knew enough about them.  I was concerned about the lack of transparency and the lack of any tools for enforcement and the lack of prohibition against fraud and manipulation.”

Born has now been vindicated, and the Obama administration has introduced legislation to regulate the derivatives markets.  Additionally, she was honored with a prestigious John F. Kennedy Profiles in Courage award last year.