Announcing Our New Economic Crisis Special Report

Tuesday, 14 October 2008 07:37

Due to the heavy response we have had from our readers regarding our recent blog postings and an article that ran in the Spectrum Newspaper, we have consolidated a free special report that is available for download.  The report, How to Survive the Current Economic Crisis, provides in more detail information on the current economic crisis, how we got here, and what we can do to protect ourselves for the future.

I've included a link to the download, How to Survive the Current Economic Crisis, and also posted a banner on our homepage.  We encourage you to download and read the special report, and then share the link with your family and friends.

Remember, it is not too late to protect yourself during these volatile times.  After you read this special report, schedule your free consultation with one of our qualified financial advisors.

Brock and Associates, LLC is a financial planning firm specializing in asset protection and wealth preservation.

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Why Insurance Consumers Are Protected from the Crisis

Tuesday, 07 October 2008 08:18

In a recent post, we addressed concerns some of our readers had regarding the safety of their insurance policies, particularly those with policies under AIG.  We again want to emphasize that the insurance industry is regulated by state laws, and held to much stricter standards and oversight.  We've attached a statement that was sent out by the NAIC regarding insurance protection for consumers in this economic climate.

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FOR IMMEDIATE RELEASE
INSURANCE CONSUMERS PROTECTED BY SOLVENCY STANDARDS
Regulatory Safeguards Offer 'Insurance Policy' in Times of Crisis

KANSAS CITY, Mo. (Sept. 16, 2008) — National Association of Insurance Commissioners (NAIC) President and Kansas Insurance Commissioner Sandy Praeger today issued the following statement in response to the financial issues facing American International Group (AIG):

"We have a very strong message for consumers: If you have a policy with an AIG insurance company, they are solvent and have the capability to pay claims. Our job is to ensure that they continue to have the ability to pay.

"In this particular instance, AIG's insurance subsidiaries are being asked to provide liquid assets to the financially distressed non-insurance parent company in exchange for noaan-liquid assets. The New York State and Pennsylvania Insurance Departments are working with AIG to review the transaction. State insurance regulators will only approve this type of action if they are assured it is part of a total resolution of the liquidity issue at the parent company and fairly compensates its insurance company subsidiaries.

"As a holding company, AIG is a separate, federally regulated legal entity that is distinct and apart from its subsidiary insurers. The subsidiary insurers are governed by state laws designed to protect the interest of policyholders. State insurance regulators are committed to protecting the interest of policyholders and will work closely with AIG management and other regulators to fulfill this commitment.

"The No. 1 job of state insurance regulators is to make sure insurance companies operate on a financially sound basis. If needed, we immediately step in if it appears that an insurer will be unable to fulfill the promises made to its policyholders. This includes taking over the management of an insurer through a conservation or rehabilitation order, the goal being to get the insurer back into a strong solvency position.

"State regulators have numerous actions they can take to prevent an insurer from failing. Claims from individual policyholders are given the utmost priority over other creditors in these matters — and, in the unlikely event that assets are not enough to cover these claims, there is still another safety net in place to protect consumers: the state guaranty funds. These funds are in place in all states. If an insurance company becomes unable to pay claims, the guaranty fund will provide coverage, subject to certain limits.

"It is a state insurance regulator's responsibility to protect policyholders and ensure a healthy, competitive market for insurance products. Strict solvency standards and keen financial oversight — based on conservative investment and accounting rules — continue to be the bedrock of state-based insurance regulation."

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Brock and Associates, LLC is financial planning firm specializing in asset protection and wealth preservation.  We encourage you to take control of your financial situation and protect yourself durning these volatile times.  Schedule your free consultation and make sure that you are sufficiently protected from the coming storm.

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Where Fannie and Freddie Went Wrong

Wednesday, 01 October 2008 15:53

This article was recently brought to our attention regarding Fannie Mae and Freddie Mac.  It was originally published in the New York Times by Steven A. Holmes on September 30, 1999.

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The New York Times
By Steven A. Holmes
Published: September 30, 1999

In a move that could help increase home ownership rates among minorities
and low-income consumers, the Fannie Mae Corporation is easing the
credit requirements on loans that it will purchase from banks and other
lenders.

The action, which will begin as a pilot program involving 24 banks in 15
markets -- including the New York metropolitan region -- will encourage
those banks to extend home mortgages to individuals whose credit is
generally not good enough to qualify for conventional loans. Fannie Mae
officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been
under increasing pressure from the Clinton Administration to expand
mortgage loans among low and moderate income people and felt pressure
from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been
pressing Fannie Mae to help them make more loans to so-called subprime
borrowers. These borrowers whose incomes, credit ratings and savings are
not good enough to qualify for conventional loans, can only get loans
from finance companies that charge much higher interest rates --
anywhere from three to four percentage points higher than conventional
loans.

''Fannie Mae has expanded home ownership for millions of families in the
1990's by reducing down payment requirements,'' said Franklin D. Raines,
Fannie Mae's chairman and chief executive officer. ''Yet there remain
too many borrowers whose credit is just a notch below what our
underwriting has required who have been relegated to paying
significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one
study indicates that 18 percent of the loans in the subprime market went
to black borrowers, compared to 5 per cent of loans in the conventional
loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae
is taking on significantly more risk, which may not pose any
difficulties during flush economic times. But the government-subsidized
corporation may run into trouble in an economic downturn, prompting a
government rescue similar to that of the savings and loan industry in
the 1980's.

''From the perspective of many people, including me, this is another
thrift industry growing up around us,'' said Peter Wallison a resident
fellow at the American Enterprise Institute. ''If they fail, the
government will have to step up and bail them out the way it stepped up
and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a
mortgage with an interest rate one percentage point above that of a
conventional, 30-year fixed rate mortgage of less than $240,000 -- a
rate that currently averages about 7.76 per cent. If the borrower makes
his or her monthly payments on time for two years, the one percentage
point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not
lend money directly to consumers. Instead, it purchases loans that banks
make on what is called the secondary market. By expanding the type of
loans that it will buy, Fannie Mae is hoping to spur banks to make more
loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to
all potential borrowers who can qualify for a mortgage. But they add
that the move is intended in part to increase the number of minority and
low income home owners who tend to have worse credit ratings than
non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the
economic boom of the 1990's. The number of mortgages extended to
Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according
to Harvard University's Joint Center for Housing Studies. During that
same period the number of African Americans who got mortgages to buy a
home increased by 71.9 per cent and the number of Asian Americans by
46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for
homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag
behind non-Hispanic whites, in part because blacks and Hispanics in
particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that
by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio
be made up of loans to low and moderate-income borrowers. Last year, 44
percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is
investigating allegations of racial discrimination in the automated
underwriting systems used by Fannie Mae and Freddie Mac to determine the
credit-worthiness of credit applicants.

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The following article was originally published in the New York Times by Steven A. Holmes.

Brock and Associates, LLC is fee-based financial planning firm specializing in comprehensive financial planning and wealth preservation.  For more information on the status of the economy and other financial related topics, please visit our financial planning blog.

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Crisis Investing: Considering 9/11

Last Updated (Tuesday, 30 September 2008 15:45)
Written by Hank Brock, CPA, MBA, CLU, ChFC

In our last post, we mentioned we would try and post a piece that was prepared for our clients on September 11, 2001.  It is entitled "Crisis Investing."  We hope that you will find this reposting both of interest, and reassuring.

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September 11, 2001

Dear Client:

Like you, we here at Five Star are saddened by the loss of countless lives at the hands of the terrorists in the attacks that occurred today. I am sure that all Americans, and all decent people throughout the world, will sympathize, condemn, and take the needed steps to lessen the likelihood of a repeat occurrence.

I am sure you are wondering what the impact of today’s terrorist attack on the World Trade Center might have on the stock market in the upcoming days.  Of course, neither the stock market itself nor any money manager can prepare itself for such an event any more than the general public or the most sophisticated security systems employed by our national security agencies can prepare for such an event.

But, it does help in times like these to step back and take perspective. I was just reminded about a conversation I had just three days ago (Friday), when I spent three hours visiting with one of the most highly regarded persons in the financial services industry and in Utah.  Over age 70, he observed, "too many people do not think things through adequately.  Think things through. And don’t over-react to events." 

To this end, I have prepared a sheet titled "Appreciating Crisis Investing."  Note that the average return during the year following a "bear" market is 32%, and the average return following a crisis that caused the market to plummet was 21%.

It is likely that those few who panic will drive the Dow Jones Average down 500-1,000 points (or more) tomorrow.  (At this writing, I have unconfirmed reports that the stock exchange might be closed as long as until next Monday, September 24th.  That would be wise.)  Regardless of a few who typically panic, the vast majority will keep their heads about them and ride this through – sometimes that’s all we can do.  Then, there will be a few who will rightfully see this as a further "buying opportunity," given that the market is already selling at what we believe to be a 40% discount. 

That great American financier, J.P. Morgan was once asked how he accumulated all his wealth. His response? "I buy my straw hats in the wintertime."  I can picture him in his Pullman Train Car heading from New York to West Palm Beach.  We all know people who do their Christmas shopping the week after Christmas, buy their snow-blowers in the

Spring and their lawn-mowers in the Fall. Why do we understand "Contrarianism" in the consumer realm, but don’t recognize it in the investment realm?  The laws of supply and demand remain the same, and make this a great buying opportunity, perhaps the best I’ve seen since Jimmy Carter was President some 20 years ago when the Dow was at 750 (now its around 10,000).  If you have money invested for the long-term that are in money market funds or CDs right now, it is probable that by the time you get back into the market, you will have missed 20-40% on the upside.  Now is the time to invest.

What if the terrorist had instead plowed the plane into the building of the New York Stock Exchange?  Or the Prudential Tower in Newark, NJ?  Or the John Hancock Tower in Boston?  Did you know that every day each of those organizations and virtually every other major company in America downloads all their data to a remote record-keeping site hundreds or thousands of miles away?  (I know that in Hancock’s case, it is in New Mexico.)  Most of the investing public is not aware of this.

In summary, there might be some stormy days ahead, but in time, the ship will right itself and all will be well.  The Number One Rule of the Successful Investor:  Patience.  There has been turbulence before, and there will be turbulence again, and those that keep their heads about them will do fine.  Keeping perspective breeds patience.  Study the attached sheet, and keep perspective.

Sincerely,

Hank Brock, CPA, MBA, ChFC
President

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Follow-up: Understand the Commotion in the Economy

Monday, 22 September 2008 09:00

Dear Clients and Friends,

Thank you for your responses to our email message to you of the other day.  I would like to make a few additional observations about recent days. But first, I would like to share something. Typical of the responses to our email has been the following email from a client (who spent a 30-year career as a banker):

“Thank you VERY much for sending out this update!  Interestingly enough, both R____ and I have been able to watch the recent "financial game shows" without worry or stress. Like I said when we started our working relationship together, we don't mind if our funds do not grow very much, or they stay static; we will be content as long as we do not lose any principal.”
--D. A., St. George, UT  9/18/08

I would like to emphasize that we have every expectation that anyone with traditional-fixed or indexed-fixed annuities will be receiving a respectable return on their account, and not just stay static, but this person had the right perspective because they were focused on the safety of their principal. My main point in  the message of the other day was to reassure you that your principal is not at risk.  In fact, always remember that before anyone can ever get any return on their account, they must first protect their principal!   It’s the principal that must be protected!

Especially if you are a retiree, you must continue to emphasize safety and protection of principal before anything else.  As comedian Will Rogers once said, “I am more interested in the return of my principal than the return on my principal.”  This is what you have hired us to accomplish for you, no matter the tossing about of the economy.  We would like to emphasize that there is no place else, in our opinion, that assures you safety of your principal in the days ahead than how we have positioned your assets… not bank savings accounts, not money market funds, not gold or precious metals, and certainly not stocks, bonds, or real estate. 

So, now is not the time to take risks, no-matter what some newsletter might be saying about “how to profit from the coming crash”!  Stay away from those that would point out some road to easy money at this time.  Many people are especially vulnerable in times like this to “inside tips” in newsletters or late-night infomercials because people will invest on the “hope” of making a gain through some “secret” strategy. Don’t fall for it!  Stick with tried & tested approaches with a proven track record through times like this.

So, while all about us in the economy are losing their heads and panicking, and therefore will be the ones most hurt in any volatility, let’s keep ours planted firmly in the most sensible and safest solutions available to us.  As the couple above noted, you must ignore the sensationalism of the press that must keep their ratings up. (As you know, in my other articles I have not said there isn’t a problem in the economy; quite to the contrary.  I have merely emphasized that you are positioned in the safest place available, a place that rode through the Great Depression without loss of principal.)

Our firm has been through many of these period before: the 79-81 hyper-inflation period, the 87 market crash of 23% in a single day, the 89-91 Savings & Loan debacle, the 2000-2002 prolonged crash after the over-speculation dot-com burst of the late 1990’s, and several bear markets in between.  We have yet to see anything like what we saw in those periods. You’ve hired us as professionals to take you through these periods.  We will do this.

Once again, keep current by visiting our website often where we will occasionally post commentary to our blog.  This week we will post to our blog a piece titled “Crisis Investing.”   It is a piece I prepared on 9/11/2001, and my staff had it mailed out to all clients by 4:00 PM that day. You will find it of interest, and reassuring.

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