Topics: Filial support laws, 401(k) costs? Canada home prices up but sales down, US home prices up, US pensions: discount rate relief and lower equity allocation, Libor manipulation financial industry’s “tobacco moment”? low trust in financial industry results in lower retirement savings? cities in the hook for invisible guarantees might head into bankruptcy, impact of human fragility aggravated not being covered by the healthcare system.

Personal Finance and Investments

According to Kelly Greene in the WSJ’s “Are you on the hook for Mom’s nursing-home bill?” “Twenty-nine states have “filial support” laws that could be used to go after patients’ adult children for unpaid long-term-care bills. In at least one of those states, Pennsylvania, nursing homes have started routinely using the law to prod families into paying their elders’ bills or completing Medicaid paperwork on their behalf.” And while not used in the past, desperation about the cost of Medicaid programs has driven providers and states to try to use them.

Andrea Coombes writes in the WSJ’s “What your 401(k) costs…sort of” that even though employers will be required to provide very detailed information on 401(k) fees “it won’t provide a simple figure for your annual cost and some employers may bury the plan’s administration costs in with investment expenses.” By November there will be a requirement for “quarterly statements must detail any fees deducted from a saver’s balance, such as for services the saver tapped, like a loan, or for plan administration costs.” But she points out that “neither the quarterly statements nor the annual disclosure will detail a plan’s administrative costs that are paid via revenue-sharing arrangements, in which those costs are offset through the plan’s investment options.” The transaction costs (e.g. trading costs) are not included in the disclosure requirements.

Real Estate

The May 2012 Teranet-National Bank House Price Index reports that “Canadian home prices up 1.1% from the previous month and reaching a new historical high for a second month in a row. For the first time in 11 months, none of the 11 metropolitan markets surveyed showed a monthly price decline in May. Prices were up 2.0% in Calgary and 1.4% in Edmonton and Toronto.” The overall composite index increased 5.8% over same month in 2011, with only Toronto (9.9%) and Winnipeg (7.1%) exceeded the national increase over the year.

But according to the Financial Post’s “Toronto home sales dive 13% in June” and “Tepid sales numbers spur call to cash out of housing market” Toronto and Vancouver property sales were off respectively 13% and 27% last month , inventories were growing, even though prices are still up YoY basis and interest rates are low; some real estate agent are selling their homes and planning to rent.

The April 2012 S&P Case-Shiller Home price Indices show “that on average home prices increased 1.3% in the month of April for both the 10- and 20-City Composites. This comes after seven consecutive months of falling home prices as measured by both indices. April’s data indicate that on an annual basis home prices fell by 2.2% for the 10-City Composite and by 1.9% for the 20-City Composites, versus April 2011.” “On a monthly basis, 19 of the 20 MSAs and both Composites rose in April over March. Detroit was the only city that saw prices fall, down 3.6%”.

Pensions

In the Financial Times’ “US reforms set to help pension funds” Mackenzie, Bullock and Skypala report that pending US defined benefit legislation will provide relief for required company contributions to defined benefit pension plans by allowing them to replace discount rates for long-term liabilities, currently based on the average of the past two years, with an average of the rates in the past 25 years. By the way, the lower required pension contributions will increase company profit and thus taxes payable. Companies are also reducing the pension plan stock allocations while increasing bond allocations in an effort to minimize the sensitivity to further expected interest rate reductions. (While increasing bond allocations makes it easier to match assets with liabilities, doing it in such a low interest environment exposes the plan, and companies, to serious damage should (inflation and) interest rates turn up. It appears that companies, just as they were piling into higher equity allocations when equity valuations were high, are now doing the same with bonds. I am not in the forecasting business, but one might want to worry about this not ending well.)

Things to Ponder

The Economist’s “Banksters- How Britain’s rate-fixing scandal might spread- and what to do about it” opines that the Libor manipulation by the banks might turn into global financial industry’s “tobacco moment” leading to class action lawsuits and increased regulation. Also, that the apparent collusion between banks “looks less like rogue trading, more like a cartel”. However in the post-2007 credit crunch, Libor manipulation might have been done with the implicit approval of the Bank of England because a higher Libor might have indicated higher level of financial distress.  According to the Economist the banks have forfeited their clients’ trust.  In The Telegraph’s “Libor scandal: How I manipulated the bank’s borrowing rate” you get an insider’s view on how he manipulated the borrowing rate at his bank. “The British Bankers’ Association, which compiled Libor, asked for a rate submission but there were no checks. The trader said there was a general acceptance that you lowered the price a few basis points each day… (to clients) we had to explain the “dislocation of Libor from itself”. As the trader put it, everyone knew that we couldn’t borrow at Libor… even though Libor may have been, for example 2pc, the real Libor rate the bank was paying was more like 5pc or 6pc. So in fact, we needed to be lending money at Libor plus 3pc or 4pc just to break even. That is what we were telling clients.”  

In the Financial Times’ “The many ways to claw back trust” Pauline Skypala writes that increasingly people might be reluctant to save for retirement as they become convinced that financial institutions are in the game purely to enrich themselves. She refers to a recent report based on “forensic investigation of the principal/ agent problem that has created a “dysfunctional” model”…(where the industry pursues) its own self-interest, at the expense of its customers”. Michael Johnson, the author of the report, “comes up with 104 recommendations, 19 of which he prioritises”. The top item on his list is “the creation of a central clearing house for annuities”. Skypala concludes with statistics showing the massive inflow of funds to Vanguard because “People trust Vanguard not to fleece them”.

In the NYT’s “With no vote, taxpayers stuck with tab on bonds” Mary Williams Walsh describes how in many US cities’ taxpayers ”…are finding themselves obligated for parking garages, hockey arenas and other enterprises that can no longer pay their debts. Officials have signed them up unknowingly to backstop the bonds of independent authorities, the special bodies of government that run projects like toll roads and power plants.” The taxpayers did not vote for those projects but because the municipalities guaranteed the bonds, they are now exposed to invisible liabilities and some of these cities might be filing for bankruptcy.

And finally in CARP’s “Ask the doctor: A tragic story to share” one gets a view about how the vulnerability of the human body can change our whole life in a minute and can become further aggravated when an accident or a rare health condition  is one “that our healthcare system does not cover”.