Monday, August 25, 2008

How to Avoid Having Unclaimed Property

There are billions of dollars of unclaimed property. We've written about a number of ways you can find out if a state or the federal government is holding property for you. See Better than having unclaimed money, though, is making sure you get everything that's yours in the first instance. Here are some ways you can avoid having unclaimed money.

Cash or deposit all checks. This may be one of the most typical sources of unclaimed money. Small checks for dividends, rebates, credit card cashback awards, refunds and the like almost seem like an annoyance, and the rise of Internet banking doesn't make it easier to deal with them. But make sure you cash or deposit all of them. A brief look at the numbers will tell you that these little checks add up. Let's assume you get $50 a year, after taxes, of annoying little checks over the course of a 50-year adulthood (mid-20s to mid-70s). We'll also assume that you're thrifty and save this money, earning 6% a year return on it. At the end of the 50 years, you'll have about $14,500. Adjusted for inflation of 3% a year, you'll have about $3,165. That's enough for a nice Carribean or Alaskan cruise. You could play a lot of shuffleboard and pig out at buffets if you just deposit all your checks. If you're not careful about these little checks, it's easy to let $50 a year slip out of your hands. Just remember that, with a little more diligence, you could taken a cruise.

Claim all rebates, refunds and rewards. One reason manufacturers like to offer product rebates, instead of just lowering prices, is that many people don't claim them. They just can't be bothered with the paperwork, which is usually enough to be annoying. Then, the manufacturer gets the best of both worlds. The consumer is lured in by a rebate, believing that he or she is getting a deal. But the manufacturer makes a sale without having to actually lower the price. Claim all rebates, refunds, and cashback and other rewards. A nice cruise is at stake. If you don't, many of these claims may not show up on government lists as unclaimed property--because it's not yours unless you try to get it in the first instance.

Keep track of your assets and organize your financial records. This may seem obvious, but it gets harder as you progress through your career, prosper and begin to accumulate all kinds of assets that seemed like a good idea at the time you invested in them. But as stocks split, mutually owned insurance companies and savings and loans become stock corporations, banks change their names, married couples holding property jointly get divorced, and so on, keeping track of all assets becomes harder and harder. People are busy and paperwork is a hassle. Data in hard drives is lost as computers are replaced and downloadings are incomplete. But not keeping track of assets means you're losing them. Take the time and trouble to keep track of what is yours. Maintain your records, for a long time. If one of your assets somehow becomes unclaimed property, you may need an ancient account statement or stock certificate to prove that you are the true owner who was last heard from 15 or 20 years ago. If you lose an average of $50 a year over the course of your adulthood because of sloppiness and laziness, another Alaskan or Carribean cruise goes down the drain.

Update your address. Another common way people lose money and other property is to fail to update their banks, brokerage firms, mutual funds, 401(k) administrators, insurance companies and other financial firms with changes of their address. This should be a nobrainer, but some people . . . .

Respond to legitimate inquiries about your accounts. Sometimes, you might get an inquiry from a bank or other firm to verify that an account is yours. Make sure the inquiry is legitimate (never give out information over the phone or in response to an unsolicited e-mail). But respond to all legitimate inquiries. Otherwise the bank or other firm might turn your account over to a state agency as unclaimed property.

Leave jobs on an informed and fully compensated basis. Whenever you leave a job, make sure you find out the status and balance of any retirement accounts you have. Very important are 401(k) and employee stock option plan accounts--get account numbers and balances, and find out what options you have to keep them with the employer, transfer them and/or cash them out. If you're lucky, you might also have a traditional pension plan account. Find out if you're vested, when you might start collecting benefits, and what options you have. Collect all of the commissions, bonuses, awards and compensation you've earned. Cash out your accumulated vacation time and sick leave, if possible. Exercise your stock options if possible. Check into the situation with deferred compensation and restricted stock. For more information about things to think about when leaving a job, see

File tax returns--and deposit the refund check. Taxes are inevitable, but tax refunds aren't. You have to file a return in order to claim your refund. Amazingly, some people don't file returns even though they're entitled to refunds. Don't pay more than your fair share of taxes. File for your refund. Even more amazingly, some people don't deposit their refund checks. This violates the first rule of avoiding having your property be unclaimed. Deposit your tax refund checks. Better yet, have the refund electronically deposited into your bank account.

Thursday, August 21, 2008

Blowback from the Treasury's Authority to Bail Out Fannie and Freddie

The Treasury Department received the authority to bail out Fannie Mae and Freddie Mac in the mortgage assistance law signed by President Bush on July 30, 2008. This law gave Treasury the power to lend Fannie and Freddie an unlimited amount of money and to invest in their stock or other securities on whatever terms Treasury thought were appropriate. The idea was that the presence of the bailout authority would reassure investors and the financial markets, and allow Fannie and Freddie to seek new infusions of capital from private sector sources. Assuming private capital could be obtained, no government money would be needed and there would be no risk to the taxpayers.

Just the opposite seems to have happened. The real estate markets continue to decline, because losses from the mortgage crisis get larger every time we turn around. The rates of defaults and foreclosures are still rising, because so many mortgage loans have escalating payments that borrowers can't meet. These ever-increasing loan failures depress the real estate market further, which exacerbates the losses Fannie and Freddie already face. As Fannie and Freddie write off ever larger amounts and announce more quarterly losses, private sector sources of capital become more skittish and the prospect of an actual Treasury bailout looms.

The market believes that any Treasury bailout will squeeze out current Fannie and Freddie shareholders. A squeeze-out makes sense, because stockholders shouldn't be protected at the expense of taxpayers. But the risk of a squeeze-out further discourages potential investors from providing Fannie and Freddie with new capital. Why invest in these loss-laden behemoths only to be squeezed out by the Treasury Department a short while later? Fannie and Freddie's stock prices have dropped about 60% this week and now trade in the middle single digits. That's the price range that companies approaching bankruptcy often trade in.

Thus, the mere existence of Treasury's bailout authority discourages investors from infusing Fannie and Freddie with new capital. That, in turn, makes government bailouts essentially inevitable. Treasury probably knows this, but may well hope to delay the bailouts until after the presidential election. Lots of luck. Fannie and Freddie reportedly have to roll over some $225 billion in debt in September. Just two days ago, Freddie had trouble placing some $3 billion in 5-year notes, paying an unusually high interest rate. How will Fan and Fred refi $225 billion in September given the current state of affairs? A Treasury bailout may have to be done soon. Real soon. Maybe Treasury will offer Fan and Fred a Labor Day weekend special rate on new capital. Perhaps the end result will be their nationalization.

That wouldn't be a bad thing if it's handled properly. They're close to nationalized anyway, and someone's got to staunch the bleeding at these gray elephants. But the people running Fannie and Freddie have proven in abundance that they are not up to the job of properly intermediating the mortgage markets. Fannie and Freddie should be eased out of the business of buying new mortgages, and gradually liquidated. The Fannie/Freddie model--private profit with the risk of loss socialized--must be taken to Boot Hill.

One or more new agencies should be created to replace Fannie and Freddie. This time, let's make the government guarantee explicit, as it is with Ginnie Mae, the one mortgage intermediator who doesn't seem to be in trouble. That's because Ginnie Mae maintains high standards for the quality of mortgages it buys. If the taxpayer exposure is explicit, the management of the new agencies will have to be responsible about how they go about doing things. And, as for those mortgages that are too risky for government purchase, there's always the private sector. This time, with no implicit government guarantee to do a fan dance for investors, private mortgage intermediators, who will be expected by investors to keep some skin in the game, will insist on sound underwriting of mortgages. Perhaps then the mortgage markets will actually begin to behave rationally, and real estate values will solidify instead of imitating a fallen souffle.

Saturday, August 16, 2008

Putin's March Through Georgia: There Goes the Peace Dividend

The more Russia promises to cease firing and stand down, the farther Soviet forces advance into Georgia. Those forces bear the markings of the Russian Federation. But there's no doubt they represent an attempt to revive the Soviet Union, a confederation consisting of Russia as the Sun and surrounding "nations" as satellites.

It's difficult to predict when Soviet forces might pull back. They continue aggressive operations, destroying Georgian munitions, transportation facilities and military equipment. This, by any reasonable definition, constitutes the prosecution of war. Sure, Russian President Medvedev signed a truce agreement today (8/16/08). But is an agreement truly binding when the butler signs it? The Big Cheese (that Putin fellow) doesn't seem to think so.

Officials in Washington and Paris sputter their outrage. Putin is probably snickering into his sleeve. The Poles are somewhat more pragmatic, coincidentally signing up for some missile defense right after Soviet tanks again roll across a sovereign border. Poland seems to have learned from hard experience what works and what doesn't.

In the fading light of his lame-duckness, President George W. Bush has been exquisitely hoisted on his own petard. He chose Georgian president Mikhail Saakashvili as an ally. That choice was, to say the least, a misjudgment. It would probably pay off handsomely to play poker with Saakashvili. He allowed himself to be snooked by South Ossetian separatists firing off a few artillery rounds into launching the Georgian military at Ossetian territory occupied by Soviet troops. What on Earth was Saakashvili thinking? Did he expect the Soviets to apologetically retreat? Even loonier, did he think the U.S. would send in military support? Never in the 45-year Cold War were U.S. troops ordered to make a direct attack on Soviet troops. What did Saakashvili think was so golden about his rear end that U.S. military personnel would be called upon to protect it?

But President George W. Bush's miscalculations didn't stop with a bad bet on Saakashvili. His little adventure in Iraq burned out U.S. military strength and U.S. goodwill in Europe. Both are badly needed in the current confrontation with the Soviets, who really do have weapons of mass destruction. But our military can't fight another war right now. And today's Western European leaders make Neville Chamberlain look like the picture of fortitude. At least Chamberlain understood that the little man with the funny moustache was a serious threat and authorized faster rearmament of Britain's military, including the construction of the Spitfire (a fighter plane that became the darling of the Royal Air Force during WWII).

That takes us to the point of this blog. The resurgence of the Soviet Union will lead to increased U.S. military spending. It doesn't matter who wins the Presidential election in the fall. John McCain won't back down from a Soviet threat. Barack Obama can't afford to let himself appear weak in foreign affairs, lest he prove the Republican charge and lest he weaken America's ties with energy producing former Soviet satellite states in Central Asia and with newly democratized nations in Eastern Europe (who are our best friends in Europe). The next president will have to deal with the central tenet of Soviet foreign policy: might makes right. W is very weak right now, and Putin feels like he has a free hand to march through Georgia. The U.S. won the first Cold War without having a face-to-face shootout with the Soviets because American military capabilities were always enough to prevail. To hold the Soviets in check now, the U.S. will have to have comparable capabilities. That will be expensive.

From an economic standpoint, that means greater U.S. military spending, higher taxes and a larger federal deficit. Other needs--universal health insurance, fixing Social Security and Medicare, investment in alternative energy, protection of the environment--are likely to diminish in importance. Perversely, the dollar may strengthen. After all, who wants invest in a Europe threatened by thousands of Soviet tanks--or even just the cutoff of Soviet natural gas? But the peace dividend--that sharp drop off in military spending that allowed President Clinton to reduce federal spending and balance the budget--is gone, gone, gone. Even if U.S. military involvement in Iraq decreases, dollars saved from that misadventure will be needed to corral the Soviet bear. And those savings won't be enough to pay for the hardware and technology needed to counter the Soviet ability to project strength almost anywhere on the globe.

Obviously, America and Americans don't want a confrontation with the Soviets. We have enough problems. But this problem has been brewing for a long time and will be with us for a long time. Vladimir Putin ain't going anywhere any time soon, whatever democratic processes Russia may have. Russia has become increasingly defensive and even paranoid as the U.S. has co-opted many of the former Soviet satellite nations into becoming U.S. allies. If Mexico, Canada, Jamaica, the Dominican Republic and all of Central America signed up to become Russian allies, the U.S. would feel defensive too. The wounded Russian bear is snarling and lashing back. It would be inconceivable for the U.S. to try to kill the bear, but it cannot let it run loose either. It must contain the bear, and that will cost a pretty penny for a long time to come.

Sunday, August 10, 2008

Where Are the Losses from the Commodities Bust?

The price of oil has recently plummeted from $147 a barrel to $115. The stock market has responded exuberantly. In spite of continuing losses to the big banks and Fannie and Freddie from the mortgage and real estate messes, stocks have reached a six-week high, mostly due to a rising dollar and falling oil prices. The financial news has been positively glowing.

But, in the markets, when there are winners, there will also be losers. A sharp drop-off in the price of something as important as oil will be costly to those that own oil, and those that were speculating that oil prices would rise further. Americans today understandably have little sympathy for owners of oil. Oil owners have made money hand over fist over hand over fist in the last three years. If they lose some money now, only crocodiles will cry for them.

But oil speculators are another matter. The image of the speculator--a greedy financial sharpy who heartlessly profits at the expense of honest, hardworking folks--is somewhat off the mark these days. Many speculators are the pension funds, mutual funds, college endowments and other financial institutions that ordinary Americans depend on for their retirements or educations. While the sharpies of yore still lurk in the markets, much of the flood of capital in recent years into the commodities markets came from bastions of the American investment community. They have been taking losses, probably big ones considering the prevalence of leverage in commodities speculation.

Where there is leverage, there are lenders. In the case of commodities, the commodities firms will be the lenders in the first instance. Of course, they don't keep piles of cash on their credenzas in case a customer wants to trade on a leveraged basis. They borrow funds from banks and relend it to their customers. That, in effect, puts the banks at risk if the customer can't repay. When you have price drops as sharp as the ones we've seen in recent weeks, some customers will probably be hurting. The banks aren't likely to be indulgent; they learned the painful way about the costs of being indulgent from the losses they took lending to real estate and mortgage speculators. Those who borrowed to trade in commodities futures will have to repay their loans promptly, or lose their investments.

Recall the collapse of Amaranth Advisors in 2006. This hedge fund made highly leveraged bets in the natural gas market, taking on billions of dollars of exposure. Things, as they say, didn't quite work out, as prices moved in the opposite direction of Amaranth's bets. Billions were lost and the fund collapsed in short order.

Given the more than 20% drop in oil prices in recent weeks, it's likely that aggregate losses from the drop in oil prices run in the tens of billions, at least. Moreover, others who were speculating in currency futures have likely taken losses from the rise of the dollar (which came at the expense of the Euro, yen and pound). All of these losses have received no attention from the financial press, but they are there. And they could be large enough to further erode the already eroding capital positions of the major financial institutions. We can be confident that more losses from the mortgage and real estate mess will hit the banks. They've admitted, although not quantified, as much. Only Merrill has chosen to confront the beast by selling off a large amount of CDOs and taking what it's had coming in the wood shed. We can only hope it doesn't have more losses coming from off-balance sheet sources. While stock market gains may, to some degree, offset the commodities trading and commodities lending losses of the major banks, let's remember that the commodities exposure involves leverage, and leverage can magnify the pain many times over. Stock market gains are likely to be less leveraged.

The key question now is where are the losses from the commodities bust? In addition to sinking oil prices, the prices of other commodities like copper, gold and platinum have been dropping. That means more losses. It's important for banks and financial regulators to pinpoint the location of these losses quickly, and deal with them. Waiting for them to emerge in due course, as was the m.o. with mortgage and real estate losses, has led to the death of a thousand cuts. We don't want to replay that videotape.

Sunday, August 3, 2008

Forget About the Fed Meeting This Week

The Federal Reserve will hold interest rates steady at its meeting on Tuesday, August 5, 2008. Doing anything else would only upset the apple cart, and the last thing the Fed needs is apples spilling everywhere. But leaving rates unchanged is a gamble that inflation won't spin out of control. The Fed will express concern about inflation, but words are all the inflation hawks will get from this meeting.

The important date is Thursday, August 14, 2008. That's when the Bureau of Labor Statistics will release the July 2008 Consumer Price Index figures. The critical question is whether rising energy and food prices have filtered more broadly into consumer prices, causing widespread increases. This "cost-push" inflation would be the Fed's worst nightmare. Cost-push inflation is difficult to contain, except by raising interest rates and forcing the economy into a nasty recession. Maybe we're in a recession now, but the kind needed to shut down cost-push inflation is much worse.

The grinding and ever-increasing inflation of the 1970s was of the cost-push variety, and was halted only by a recession in the early 1980s that drove unemployment above 10% (we're at 5.7% now). The cost-push in the 1970s came from wage increases that pushed up the prices of products and services, which in turn pushed wage demands even higher. Workers today don't have the labor unions and other market power to extract similar wage increases. But energy is a component of all goods and services, and its rising costs are ubiquitous. Businesses face growing pressure to raise prices to cover energy expenses (and sometimes to subsidize employee commuting costs). Some economists argue that the economic slowdown will constrain price increases. Perhaps so to some degree, but many businesses are past the point of being able to absorb more cost increases. Either they raise prices or they go under (the airlines serve as Exhibit A in this regard). And if they go under, their competitors will have more room to raise prices. Cost-push inflation is becoming a real danger, and could push the Fed farther back into the corner. Next week, we'll know more.