Wednesday, November 26, 2008

Newman's Own will

The New York Times reports that Paul Newman's will has been admitted to probate. Good news, he used trusts, which will keep most of the estate plan private and provide grist for Merrill Anderson newsletters.

Mr. Newman really doesn't want his image abused. His will bars any
virtual performance or reanimation of any performance by me by the use of any technique, technology or medium now in existence or which may be known or created in the future anywhere in the universe.
The universe is a pretty big place, but Newman was a big guy.

Happy Thanksgiving to all!

Our nomination for best illustration of the season goes to Teresa Fasolino's vegetarian turkey in The New York Times. You can see other examples of her work here.

In 1623, when the Pilgrims held a second feast to celebrate a narrow escape from starvation, the main dish was probably fish. Miles Standish saved them by sailing to what is now Rye, New Hampshire and placing a large order for cod with the state's first settler.

Those first Thanksgiving feasts must have been pretty grim by modern standards. Even the lowliest wealth manager should eat a lot better tomorrow.

Let us all count our blessings!

• • •

Wild turkeys now flourish in New England. The New Hampshire birds shown here take the state motto literally: "Live Free or Die!"

Monday, November 24, 2008

Why the Citi Never Slept

Citi's sleepless nights – and now its bailout – resulted from nightmares about Collateralized Debt Obligations. Yesterday's New York Times tells the story in depth.

Citigroup's risk management failed because of disorganization and cronyism, the Times reports.

But Citi has plenty of Wall Street company in its failure to manage risk. Here's one theory why:

Once a large corporation appoints a risk-management officer, the rest of the management team figures it can ignore risk.

And that's assuming management understands the monsters created by its financial engineers. Citi's shareholders aren't amused when they read that former CEO Chuck Prince "didn’t know a C.D.O. from a grocery list."

Sunday, November 23, 2008

Friday, November 21, 2008

Dividing the Estate

After an Off-Broadway run last year, Horton Foote's "Dividing the Estate" has been tuned up and shined up as a Broadway production. NY Times drama critic Ben Brantley applauds the result. He finds Foote's portrayal of a haute-bourgeois Texas clan squabbling over an estate to be dead on:
Literature is filled with people who find greatness in crisis. Mr. Foote’s strength lies in drawing characters, with a gaze as clear and fresh as spring water, who remain as doggedly small as they always were.

* * *
[Hallie] Foote, the playwright’s daughter and frequent interpreter, makes Mary Jo a figure worthy of Molière, a small-boned, ineffective though tenacious bird of prey with ravenous eyes and a jutting neck. When it comes to dividing the estate, leave it to Mary Jo to say bluntly what’s really on everyone’s mind: “I want everything — what about you?”
By serendipitous coincidence, the family turmoil has been intensified by . . . a real-estate bust.

Thursday, November 20, 2008

Deflation? Inflation? It's all SAD

The financial and investment crisis is stressing people out, therapists tell Marketplace. You might call it Societal Anxiety Disorder.

SAD to say, wealth managers and their clients can't even be sure of what to be anxious about.

Deflation has reared its fearsome head. Mark Trumbull in The Christian Science Monitor explains why increasingly valuable dollars lead to SAD:
Back in the Depression era, economist Irving Fisher coined the phrase "debt deflation," to refer to a period when many debtors are trying to reduce their liabilities, or leverage. When borrowers are de-leveraging all at once, prices for assets such as homes or stocks can fall below what would ordinarily be their fair value.

Moreover, if deflation becomes a broad-based trend that consumers expect to see in everyday goods, they may delay purchases in the hope of getting an even better price later.
Long term, inflation seems inevitable. As this educational chart from Wikipedia shows, deflation was mainly a feature of the hard-money era. Ever since the Great Depression, paper money has been printed fast enough to keep inflation alive and well.


What about it? Should wealthy investors worry about deflation, inflation or both?

Celebrate small banks

They are doing very well, reports Washington Monthly. Key points:
Easily overlooked amid the crisis of big banks today, small-scale financial institutions are, for the most part, holding steady—and sometimes even better than steady. According to FDIC data, the failure rate among big banks (those with assets of $1 billion or more) is seven times greater than among small banks. Moreover, banks with less than $1 billion in assets—what are typically called community banks—are outperforming larger banks on most key measures, such as return on assets, charge-offs for bad loans, and net profit margin.
How will these banks be affected as the giants are bailed out? Wouldn't we be better off with thousands of strong small banks than a handful of powerhouses? An analogy to chain mail comes to mind.

Advertising Lesson From a Master: David Ogilvy

Reproduced below, as it appeared in The New Yorker five decades ago, is one of the most famous ads from Madison Avenue's glory days. Created by David Ogilvy, this Rolls Royce ad used a quirky quote from a motoring magazine for its headline, followed by body copy that was twenty times too long by conventional standards.

The headline became a catch-phrase of the day. The body of the ad reflected Ogilvy's heretical belief in the power of lengthy copy. If that copy is sufficiently readable, interesting and informative, it can leave the reader salivating for a product or service.

Tuesday, November 18, 2008

Rich Cut Their Lovers' Funding

When recession hits the rich, the rich get stingier. So report after report from the megamillionaire front keeps telling us. This Wealth Report post suggests that the trend has already arrived at Silly Season.

One helpful factoid noted by Robert Frank:

"[I]n a time of financial crisis, it is better to be a kept man than a compensated woman."

Monday, November 17, 2008

Mrs. Astor's Staff Was Listening

The New York Post has published excerpts from Meryl Gordon's Mrs. Astor Regrets. The new book seems unlikely to gladden the heart of Mrs. Astor's son and daughter-in-law:
Secret journals kept by Brooke Russell Astor's staff reveal tragic scenes, including one in which the society doyenne was literally dragged into a meeting against her will to sign over $60 million to her only son after she slammed her cane against the floor shouting, "Do you hear me?"

When they weren't caring for her in person, Astor's maids, nurses and butlers were listening to her private meetings via a baby monitor. They filled 30 journals over four years…
Meanwhile, the estate struggles to dispose of Brooke Astor's homes in a down market. Her palatial New York apartment is now offered at $34 million, down from $46 million.

Perhaps a better buy is her beloved Holly Hill in Briarcliff Manor. Sotheby's has listed the stone home, on 64 acres, at a mere $12.9 million. Judging from the photo at right, Holly Hill was a bright and cheery place. Hope the late owner was able to comprehend and appreciate her last days there.


Sunday, November 16, 2008

Why Young Men Shouldn't Manage Money

Corporate fiduciaries may function better if they hire women and older men as wealth managers. Why avoid young men? According to research cited by The New York Times, it's all a matter of the endocrine system.

Friday, November 14, 2008

What Next for Retirement Plans?

Edward Zelinsky, the professor Jim Gust mentions in the preceding post, authored The Origins of the Ownership Society: How the Defined Contribution Paradigm Changed America. The ownership society seeks to help people build wealth through 401(k) plans, HSAs, etc. (The Ownership Society is not to be confused with the late and unlamented Buyership Society, which encouraged people to buy homes on credit, then borrow again on any increase in value.)

Events have not been kind to 401(k) plans of late. Critics have attacked the expense of some plans. High annual fees and expenses virtually insure subpar investment results. Reportedly, some wealth managers advise their executive clients to invest no more in their 401(k)s than is matched by the employer.

In the last 15 months participants in 401(k) plans have lost an estimated $2 trillion. Also, the recession threatens 401(k) matching funds. Reportedly, 20% of participants in some plans have stopped adding new money, either for lack of employer matches or because they feel stocks are too cheap to be worth buying.

Meanwhile, some of the last traditional pension plans – at GM, for instance – are dying.

Do we need a new approach to building financial independence at retirement? Roger W. Ferguson Jr., a former Vice Chairman of the Federal Reserve and CEO of TIAA-CREF, thinks so. He proposes combining the best of traditional pensions and new savings vehicles. Features would include automatic enrollment, unbiased investment advice for every participant and a requirement that participants put at least some of their money into a low-cost annuity at retirement.

Could it work?

Here's an alternative, heretical thought. Consider these excerpts from Amazon's description of The Origins of the Ownership Society:
We save for retirement, health care and educational savings through IRAs, 401(k) accounts, 529 programs, FSAs, HRAs, HSAs and other individual accounts which did not exist a generation ago. In its own way, the emergence of these accounts has been a revolution…. The Origins of the Ownership Society describes the defined contribution revolution, its causes, and implications. For lawyers, the book provides useful insights into the network of individual accounts which are now central features of the U.S. income tax….
Nobody but a tax lawyer understands all the variations, limits and withdrawal requirements of all those accounts. Why not keep our current tax-favored treatment of dividends, capital gains and interest on state and local bonds, then let everybody save and invest, simply and economically, for whatever purposes they desire?

No rules, no regs, no restrictions!

Thursday, November 13, 2008

Is Warren Buffett hypocritical on estate taxes?

Professor Edward Zelinsky asks the question, if Warren Buffett is such a fan of federal estate taxes, why has his own estate planning been arranged to dodge those taxes? He could have instead shared some portion of his immense wealth with the federal government, rather than give nearly all of it to Bill and Melinda Gates. Who, by the way, also are advocates for the federal estate tax who won't be paying it.

Evidently, Professor Zelinsky and I are in ageement.

Hat tip to Gerry Beyer's blog.

Fall of the High Net Worths

In a Florida gated community for the more-or-less retired, The New York Times finds Tarnish on the Golden Years. High-Net-Worth residents worry about returning to the ranks of the Mass Affluent.

The Panic of 2008 is the stock market's most shocking fall since 1973-74. But this time it's different. No harbor seems safe:
“Older middle-class people have made plans based on a set of assumptions of how the world works, and the world has gone crazy,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. Those assumptions once included the notions that bank accounts and corporate bonds were secure . . . .
High-net-worth investors have learned they can't even trust money-market funds. ("Help! My cash is being held hostage in the Reserve Primary Fund!")

Will mistrust of virtually all "financial products" make wealth management a whole new ball game?

Wednesday, November 12, 2008

"This must be how the Politburo felt"

NYTimes reports on the lobbying frenzy over the $700 billion in bailout money. No surprise, it isn't just banks looking for government capital infusions.

Sunday, November 09, 2008

“Three-Year Rule” Updated

Jonathan Clements and others used to advise retirees to keep enough ready cash to meet their living expenses for three years. These days, Jane Bryant Quinn observes, the advice is to play it safer:

"In general, the planners who answered my questions said retirees should have enough money on hand to pay their bills for the next five years."

Wealth-Building as “Risk Management”

The Sunday New York Times offers crisis-solving thoughts from several economists. Yale's Robert Shiller comes up with two outside-the-box ideas:

1. When people build their financial independence through saving and investing, they are successfully managing risk – their risk of not having enough to live on when they become old and feeble (or unemployed):
Traditional mutual funds and retirement saving plans, as well as insurance plans for loss of one’s home due to fire or flood, or of one’s income due to disability, are actually risk management vehicles that help reduce inequality. The new president’s important mission should be to broaden these plans.
2. The federal government should subsidize programs to encourage and spread investment literacy:
[W]e need to subsidize financial advice for the common man. The crisis we are in is largely due to investor ignorance. Some emergency measures, like the Hope Now Alliance, have been set up essentially to offer such help, but these will presumably be dismantled after the crisis, and they are not well designed for serving investors’ broad needs. We need some permanent subsidies to get the full scope of financial advice out to the people.
Cool idea! Tens of thousands of "Wall Street banking and investment experts" are unemployed. A new version of the depression-era Works Progress Administration could quickly form and deploy several brigades of financial advisers. Worth a try?

Saturday, November 08, 2008

Getting Mr. Market to Settle Down

Really! Mr. Market has got to stop rampaging around the Stock Exchange, bumping into floor brokers and knocking over computer terminals. In today's Wall Street Journal, Jason Zweig surveys possible control mechanisms. The German technique: Volatilitätsunterbrechung.

Thursday, November 06, 2008

The Year That Changed The Investment World

The year was 1958. Half a century ago.

Elvis Presley, three years after his debut album for RCA Victor, was inducted into the U.S. Army.

Sputnik fell to earth.

And the relationship between stocks and bonds underwent a profound, fundamental change.

Peter Bernstein, who saw it happen, describes the unprecedented shift in the relationship between equities and bonds in this column, reproduced by John Mauldin:
In the second quarter of 1958, the dividend yield on stocks was 3.9% and the yield on 10-year Treasuries was 2.9%. Three months later, dividend yields were down to 3.5% while Treasuries had climbed to match them at 3.5%. The next three months made history, as stock prices kept rising and pushed the dividend yield down to 3.3% while bond prices kept falling and drove the bond yield up to 3.8%. *** The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back.

When this inversion occurred, my two older partners assured me it was an anomaly. The markets would soon be set to rights, with dividends once again yielding more than bonds. That was the relationship ordained by Heaven, after all, because stocks were riskier than bonds and should have the higher yield. Well, as I always tell this story, I am still waiting for the anomaly to be corrected.
Could Mr. Bernstein's long wait be almost over? Though the yield on the S&P 500 remains lower than the 10-year bond yield, that bond yield is equaled by JPMorgan's dividend yield, and AT&T pays almost 6% at today's closing price. GE, 6.2%. Dow Chemical, 6.7%. Pfizer, 7.5%.

Fifty years ago, prudence for investors living on their capital was routinely boiled down to one simple rule, beloved by trust officers across the land:

"Never dip into principal."

Could that concept be about to make a comeback?

Lanchester Explains Derivatives

A surprising number of visitors to this blog are drawn by a post from last June: Mortgage Derivatives Explained. The post links to a whimsical poem by Shel Silverstein – enlightening, but probably lacking the information the visitor seeks.

Here's a better bet: Melting into Air, John Lanchester's New Yorker article, explains the abstractions known as derivatives and why we are not meant to understand them:
[F]inance, like other forms of human behavior, underwent a change in the twentieth century, a shift equivalent to the emergence of modernism in the arts—a break with common sense, a turn toward self-referentiality and abstraction and notions that couldn’t be explained in workaday English. In poetry, this moment took place with the publication of “The Waste Land.” In classical music, it was, perhaps, the première of “The Rite of Spring.” Jazz, dance, architecture, painting—all had comparable moments. The moment in finance came in 1973, with the publication of a paper in the Journal of Political Economy titled “The Pricing of Options and Corporate Liabilities,” by Fischer Black and Myron Scholes.
Lanchester points out that some people did foresee the collapse of the "financial economy." They even wrote books about it.

Do the rich prefer higher taxes?

According to The Wealth Report -, the Obama victory margin came from two income groups: those earning less than $50,000 annually and those earning more than $200,000. John McCain won among those in the middle, from $50,000 to $200,000. This success among the high earners is somewhat surprising, given Obama's promise to sharply raise taxes on this group.

The Journal speculates the wealthy may have discounted the tax threat, knowing that it is hard to raise taxes during a recession, or they may really agree with Joe Biden and believe that it will be more patriotic for them to pay more.

I suspect the answer is more subtle. Like Warren Buffett, many of the rich like to say that they favor higher taxes. All the while they know that, whatever happens to the tax code, they have the sharp lawyers and accountants to find ways around any tax increase. Buffett has famously defended retention of the federal estate tax, while publicly sharing his own estate plan that eliminates death taxes for his own estate (through transfers to the Gates charitable foundation.)

The best example of a failure to successfully tax the rich was the luxury tax on yachts and other high-priced items, enacted in 1990 when Bush I was forced to break his "no new taxes" pledge. The projected revenues for 1991 were $31 million. Just $16.6 million was collected. Obviously, the rich simply stopped buying boats. (Revenue estimators are barred from taking even obvious behavioral responses into account.) An estimated 7,600 jobs were destroyed in the boating industry, according to a later analysis by the Joint Economic Committee, with a short-term cost of $24.2 million in unemployment benefits and lost income taxes. The long term cost was the loss of the American boat building industry, which never recovered, even though the disastrous luxury tax on yachts was quickly repealed in 1993.

It doesn't take much time for a toxic tax to do permanent damage.

In an ironic coda, in 1999 Rep. Patrick Kennedy proposed a 20% tax credit for purchasers of American built yachts. That would be $200,000 for the buyer of a new $1 million boat. The credit was capped at $2 million per taxpayer. We don't know if the tax incentive would have helped the boat builders, because it was never enacted.

Interestingly, in its guide to surviving the Obama tax hikes, the Wealth Report recommends "Sell. Sell. Sell." before the end of the year. How much of the selling pressure on stocks during September and October came from people trying to lock in a 15% tax rate on their remaining capital gains? Perhaps more than we think.

As evidence of the widespread anticipation of higher taxes, my son, who is much more a football fanatic than I am, told me last night that the agents for high-dollar players are already working to get bonuses paid during this year, to avoid the higher tax rates they expect next year.

Sunday, November 02, 2008

Woman Who Killed Husband Could Inherit $1.2 Million

From the Stamford, CT Advocate, news of a ghoulish probate case in the offing:
Although a jury found Mary Ann Langley guilty of killing her husband by throwing gasoline on him and lighting him on fire, she could still inherit his $1.2 million estate, family members and attorneys said.

This turn of events was made possible by a jury of eight women and four men who did not convict Langley of murder two weeks ago after a seven-day trial at state Superior Court in Stamford. The jury was unable to find beyond a reasonable doubt that Mary Ann Langley intended to kill her husband by throwing the gasoline on him, and instead found her guilty of intentional first-degree manslaughter in the December 2006 death of her husband, James, 55.

State statutes prohibit only murderers from inheriting from their victims, not individuals convicted of manslaughter.
* * *
Known in legal circles as a "slayer statute," the law in Connecticut and in 42 other states prohibits murderers from inheriting from their victims' estates, according to a state Office of Legislative Research report on the topic from February.

Because Mary Ann Langley, 59, was convicted of manslaughter and not murder, the question of whether she is eligible to receive proceeds from the estate is set to play out in Norwalk Probate Court or in state Superior Court in Stamford.