HedgeCo.Net

Reasonable Regulation: That’s Allstate’s Stand

            Many companies involved in financial services cower when an official of any stature mentions the threat of national regulation, but Allstate has decided to embrace it. Since late April, Allstate has been pushing an advertising campaign that is rooted in support for creating a national regulation agency for all players in the financial industry, including insurance companies. Each ad in the four-part series, which runs in major magazines such as The Atlantic, touts the common theme of calling on “Congress to act boldly and quickly in drafting strong, comprehensive and clear federal regulation.”[1]

             Under the current system, insurance companies are regulated on a state-by-state basis, something that Allstate CEO Tom Wilson thinks needs be changed. In a national press release, Wilson argued:

 The American consumer is burdened with a patchwork of insurance regulatory systems that are cumbersome and ineffective in managing risks in an era of rapid change and innovation. American families need better protection from systemic risks and access to products and services that will help better manage their financial futures.[2]

            Allstate’s push for a national regulation system is bold. The campaign appears to be having an impact as the Obama administration has started tackling a number of vital decisions that could ultimately lead to national regulation for all financial services. President Obama himself may not have been directly affected by Allstate’s campaign, but according to PRnewswire.com at least one Congressperson has received more than $20,000 in campaign contributions from Allstate over the past four years. Clearly Allstate has identified the potential benefits that would come bundled with national regulation.

            One group that stands to be trapped and bound by the regulatory net of a national system is the stock brokers on Wall Street. The Obama administration has proposed a plan that would hold brokers to the stricter fiduciary standards of registered investment advisors. Under this plan, brokers would be required by law to act in their clients’ best interests, not their own. Also, with each piece of investment advice, brokers would be obligated to disclose what they stand to gain personally. A plan to implement a complete regulation overhaul is sure to be cumbersome and will take time to be implemented effectively. The Obama administration would be wise to have patience with this reform and comb through all of the complexities before attempting to have anything signed into law.

 At the end of the day, the federal regulatory overhaul will aim to force those in the financial system to be more transparent, something the Allstate campaign clearly addresses: “Only when there is transparency around valuing the risk in the financial system—including the role of insurance to help mitigate that risk—will we regain confidence in the economy.”[3]           

To view all of the Allstate advertisements in their entirety, visit allstate.com/fedreg.

Commercial Real Estate’s Role in the Next Bailout

            Banks have had little to celebrate over the past 20 plus months. Still dizzy from the debacle caused by residential real estate, banks nationwide fear the devastation that could soon be unleashed by the rising number of foreclosures in commercial real estate.

            The banks which provided the money to build endless numbers of commercial buildings originally did so because they, like so many others, believed occupancy and rent rates would always consistently rise. But, many owners of commercial buildings are now fueling another wave of foreclosures because they are not able to generate enough cash from tenants to cover their principal and interest payments. Because the loans have also been bundled and sold on Wall Street as commercial-backed mortgage securities (CMBS), the foreclosed buildings spark a ripple effect. Anticipating the severe consequences this could have on our economy, the Federal Reserve is struggling to contain the situation and prevent the need for a second wave of bank bailouts.

            According to Deutsche Bank, about $153 billion in loans that make up CMBS will come due by the end of 2012. The vast majority of these will not be eligible for refinancing through their lenders because the values of the properties have dropped so dramatically.[4] The losses will potentially cripple not only the owners of the commercial properties, but also anyone holding CMBS. Furthermore, because CMBS typically help drive pension and hedge funds, the pain will be widely spread.

            The only positive side of this mess will be the number of affordable investment opportunities for those looking to get into commercial real estate. Commercial real estate does perform in the long haul. But, because of the onslaught of new commercial buildings that sprouted in recent years, we are now experiencing an uncomfortable rebalancing of the industry. Loans that were made on loose credit and then bundled by Wall Street into dicey investment vehicles are all being exposed. However, the underlying properties are not rotten; they still make for sound investments.

            Like the residential market, the commercial real-estate industry was saturated with quick deals that turned sour because they were not thought through. Now, because the consequences stretched so far, the commercial real-estate industry has to be turned upside down and untangled. Although the untangling process will be turbulent, it will also be exposing an array of investment possibilities. Commercial real estate provides the venues for consumer spending. As the economy slowly recovers, so too will the demand for prime commercial real estate—something that will be readily available and reasonably priced in the immediate future.  

Keep Health Care in Our “Best Interest”

            I have been reluctant to bring the argument of national health-care reform to the Powell Perspective because it does not necessarily pertain to real estate, finance or investing. But, national health-care reform has the potential to have drastic impact on our economy, and for this reason I believe it deserves attention here.

            I have been convinced to raise this issue after overhearing a 20-something at the gas pump discuss the issue with someone of similar age. “Man, the whole thing is no big deal, I mean how often do we really go to the doctor anyway?” he said. As I drove off, I realized that the young man, healthy and probably feeling somewhat resilient, was simply not interested in the topic. He wanted to be able to disregard the topic so he could have more attention to focus on the issues that had a more immediate impact on him.

            This week will bring an important turn in the debate over national health-care reform. The Obama administration has committed itself to rethinking the plan before the President is scheduled to address Congress on September 9^th. President Obama is now going to be leading the arguments that he has been able to mostly sidestep thus far. What has me concerned is that the administration will recognize what I did while pumping my gas: The youth do not care. If the Obama administration addresses this and rebrands the issue to somehow get the youth behind it, then the approval rating for health-care reform could skyrocket. The same demographic that helped the President win the office, could now help direct a national issue that they may not be truly interested in for another 20 years. On the other hand, maybe it is time to address the demographic who will still be paying for this change long after we are gone. After all, the people that currently have a vested interest are at a standstill after becoming equally heated on both sides of the issue.

            Since its appearance in the Obama administration’s limelight, health-care reform has done nothing but become more complex. The plan is unclear. No one knows what it will look like, we only know what the media reports: We’re currently 37^th in the world in health-care quality. Death panels will dictate how long we live. The President will personally pull the plug on our grandma. If there are details to this administration’s plan, then they have all been shadowed by heated talk show hosts’ attempts to get the public screaming about something no one knows about.

            On September 9^th President Obama is going to be forced to add some structure to his administration’s plan. Thus far, no one has been able to dissect and discredit the plan because it has only taken shape through various town hall meetings and informal gatherings. In his first address to Congress since February, President Obama will be talking exclusively about health care. This national issue is going to take rigid leadership from the President. If he wants to make any progress he is going to have to involve the nation by getting the young to care and the old to stop shouting at one another and listen.

Tags: 60-40 split, advertising, advertising campaign, Allstate, alternative asset class, alternative investments, bailout, Bank, Basis Points, benefits, Bernanke, Billion, bold, business week, Cash For Clunkers Part One: Good For Business?, cmbs, commercial real estate, commerical backed mortgage securities, Compounding Interest, confidence, Congress, contrarian investing, Credit, deutche bank, due diligence, economics, economy, ELP Capital, fiduciary, Finance, financial, Financial Future, Financial services, forbes, Geithner, harvard business review, Harvard Real Estate, health care reform, health-care, Hedge against inflation, Inflation, Investing, investment advice, market fluctuation, Money, Money Market, national regulation, newsweek, obama administration, Paulson, Piggy Bank, President Barack Obama, principal and interest payments, private investing, Putting cash to work, Putting Money to Work, Real estate, real estate asset class, real estate assets, real estate trends, Resources, Retirement, risk analysis, Ronald Reagan, Rule of 72, scared, Short Sales, Smart Money, Standing In The Rain, stock and bond split, tangible assets, The Atlantic magazine, The Powell Perspective, Thomas J. Powell, thomas powell, tom powell, Tom Wilson, traditional investment, transparency, Trillion, Trust, Trust But Verify, volatility, Wall Street, Wall Street Journal

Comments feed (RSS 2.0), comment or trackback from your site.

Philippa Aylmer, contributing editor to The Hedge Fund Journal, writes, “If the last decade could be described as the biggest credit party ever, then the end of 2008 brought the mother of all hangovers. The hedge fund industry took a beating along with much else in the financial services sector and funds of hedge funds felt their share of the pain.”

The Hedge Fund Journal’s report of the “Global 50: Funds of Hedge Funds” shows the decrease in assets under management in funds of hedge funds from September of 2008 to June 2009. With the market downturn and the uncovering of Madoff’s $50 Billion ponzi scheme, funds of hedge funds had been hemorrhaging AUM in 2008 but have slowed the bleeding in the early part of 2009. Will the fund of hedge funds recover from their wounds by the end of this year, or will it take more time? We will have to wait and see.

Here are the top 50 fund of hedge funds groups ranked by assets under management as of the end of June in 2009.

Read the rest of this entry »

Tags: Assets under management, Financial services, hedge fund, Investing

Comments feed (RSS 2.0), comment or trackback from your site.

By Steven M. Etkind and Roger D. Lorence

The Treasury Department has released its lengthy explanation of the President’s wide-ranging tax proposals.  The President aims to deliver on both tax “fairness,” especially the ending of perceived tax abuses and “loopholes,” and increasing federal tax revenues.  Particularly hard hit would be U.S. businesses with operations outside the U.S. and the financial services sector. Because of the very large number and diversity of the President’s proposals, we outline below only those of most interest to the financial services industry.  If the entire package were to be enacted, this would be one of the most sweeping revisions to the tax law since the enactment of the Internal Revenue Code of 1986.

Repeal of the Carried Interest

Under current law, the manager of a domestic partnership may receive an incentive allocation of partnership profits which is treated as a share of the various income components realized by the partnership that taxable year.  This special allocation of profit is termed the “carried interest” and has been a major spur to development in the oil and gas, real estate and investment fund industries.   The President proposes to repeal the carried interest rules for taxable years beginning after December 31, 2010.  The carried interest would be taxed as “services partnership interest” income that would be ordinary income, whatever the character of income generated by the partnership, and would be subject to self-employment taxes.  Only a manager’s profits on their own capital interest in the partnership would be exempt from these rules. Individuals performing services holding derivatives instruments in that entity would also be subject to ordinary income treatment with respect to the derivative interest.  If enacted, this would likely reduce the “mini-master” structure of offshore hedge funds which are structured to claim the benefits of the carried interest.

Commodities Dealers:  Partial Repeal of Section 1256

Current law treats U.S. persons who are dealers in commodities, equity options, and commodity derivatives as generally entitled to treatment under Section 1256 of the tax law whereby 60% of gain or loss is long-term capital gain and 40% is short-term capital gain (for so-called “60/40″ contracts).  The favorable 60/40 treatment (currently a blended maximum rate of 23% for gains) is, the President contends, unwarranted, particularly compared to tax treatment of other types of dealers, whose gains and losses are ordinary income.   The President proposes that dealer income of commodities dealers, including dealers in equity options, be taxable as ordinary income, effective for taxable years beginning after the date of enactment.

Read the rest of this entry »

Tags: Financial services, Income tax, Internal Revenue Code, Internal Revenue Service, tax, Tax forms in the United States, United States, US$

Comments feed (RSS 2.0), comment or trackback from your site.