Reuters Money

Fury brewing at ratings agencies as markets gyrate

So let me get this straight.

Ratings agencies helped spark the financial meltdown of 2008-9, when they deemed that steaming piles of mortgage junk were brimming with triple-A goodness. They were wrong – and epically so.

Now S&P downgrades the debt of the entire country, further threatens to do so another notch, teams with fellow ratings agencies to bring Europe to its knees with each new appraisal and gets an assist for wiping trillions in wealth from investors’ portfolios in just a few days.

Anyone else think the ratings agencies need a time out?

“If you had asked me a couple of years ago if they could do anything more destructive than the mortgage debacle, I would have said never,” says Roger Kirby, Of Counsel for New York City law firm Kirby McInerney, who is involved in a class action against Moody’s on behalf of shareholders. “But it seems they’re managing to do it again, right now. In order to restore their damaged reputations, they’re interjecting themselves unsolicited into sovereign markets.

“It’s not productive, it’s probably inaccurate, and they’re just going out there on their own with no real purpose to what they’re doing. When future historians are writing about this period, they will probably single out ratings agencies as the single most destructive collection of entities.”

It’s not just an academic exercise. The musings of the ratings agencies are having very real effects on people’s portfolio. In the first day following S&P’s downgrade of U.S. debt from triple-A, another trillion was erased. As a result, some individual investors are starting to do a slow burn about how ratings agencies are stoking financial chaos.

Retirement investors suffer as economy catches up to Wall Street

Retirement investors have struggled with a Jekyll and Hyde economy these past two years, where Dr. Jekyll lives very well on Wall Street while Mr. Hyde runs roughshod over a terrified Main Street.

On Main Street, the jobless rate tops 9 percent and 14 million residential mortgages are underwater – a figure Deutsche Bank thinks will hit 25 million, or 48 percent of all home loans, before the housing bust ends.

On Main Street, the economy hasn’t respond to ultra-accommodative monetary policy. Near-zero interest rates don’t matter because because there’s so little demand for credit to hire people or to buy post-bubble real estate.

Meanwhile, free money has been great for Wall Street. The companies that created Main Street’s problems through the reckless behavior that led to the financial crisis barely missed a beat, and they went right back onto the gravy train.

Now, the Jekyll and Hyde economies demand to be reconciled. The markets finally realize what Main Street has known all along: we’re stuck in a grinding, recessionary economy with no end in sight. You can’t even call what’s coming now a double-dip, because the first downturn never ended.

Monetary policy is of limited use. Interest rates already are at rock-bottom; we’ll probably see more easing soon, even though QE2 hasn’t helped much. Meanwhile, fiscal policy has been focused in exactly the wrong area — deficit reduction rather than job creation and direct stimulation of the economy.

Of course, most Americans have a stake in both the Jekyll and Hyde economies – we live on Main Street, but our retirement money is invested on Wall Street. So the obvious question: what now? I’ll be blogging about strategies for retirement investing all week, but here’s my opening comment to those of us living in the Mr. Hyde economy, don’t create a self-inflicted wound by selling out of panic during this plunge.

Gold Mine: Links and tweets from around the Web

One consequence of the stock market decline is that everyone is talking about investing in gold as it hits record highs. But what are they saying?

A quick trip around the Web today came up with a treasure trove of things to think about, from advice on what to do now, to historical perspectives to funny tweets. There’s analysis that says gold will go up, there’s analysis that says gold will go down. And there are worldwide repercussions that you might not have ever considered.

Here’s a sampling:

From the anti-gold crowd, there’s Roland Gribben, writing in the London Telegraph that this gold rush is nothing new and there shouldn’t be such a frenzy, and Alexander Green, Investment U’s chief investment strategist, writing in ETF Daily News that gold and silver investors are losing their minds. And then there are true contrarians, like Gary Noth writing on LewRockwell.com, that all the experts telling you how to invest in gold, or why to invest in gold, are not worth listening to.

Among those bullish on gold are the powers that be at JP Morgan Chase, who issued an advisory predicting that gold will hit $2,500 by the end of the year. There’s also analysis from the Autochartists Team at FXStreet.com that shows gold continuing to go up. And then there are reports like Maike Currie’s in InvestorsChronicle.co.uk that explain why “the sky’s the limit.”

For historical perspective, there’s a link to an Alan Greenspan essay on gold from 1966 that was first published in Ayn Rand’s  ”Objectivist” newsletter titled “Gold and Economic Freedom.” It’s mostly a defense of the gold standard, but it includes gems like: “Deficit spending is simply a scheme for the confiscation of wealth.”

As for unintended consequences of gold and uses of gold that you might not have thought of, there’s an article on the “Consequences of high gold prices on weddings in Pakistan” and one on gold-plated contact lenses that are now, even more, the folly of the rich. And for anyone considering wedding bands, there’s the statistical note that now gold is as valuGolable as platinum.

What U.S. debt downgrade means for ETFs

Is it time to take cover from exchange-traded funds (ETFs) now that Standard and Poor’s has cut the U.S. debt rating?

With the recent U.S. and Euro debt crises introducing new uncertainty, volatility will be the name of the game. As the frenzy of new fund offerings abates, many funds may close because they will be unable to attract sufficient assets. But a handful of safeguards can protect you.

“The number of ETFs that are shut down or liquidated, while previously a rare occurrence, is on the rise,” said Tom Lydon, publisher of the popular ETF Web site www.etftrends.com in an email. “Closings are up 500 percent in each of the last three years over 2007 levels (which equates to one each week).”

When funds close, Lydon noted, “investors are notified and have 30 days to sell on their own or receive the market proceeds at the time of the closure.”

Keep in mind that ETF assets are not insured by any government agency and you’re subject to market and often credit risk. And while many ETFs have eliminated brokerage fees to buy and sell them, they still may not closely track the index they are named after — a frustrating glitch for many investors. The popularity and perils of ETFs recently triggered a warning from a group of state securities regulators.

The North American Securities Administrators Association warned that “some traditional ETFs may be appropriate for long-term holders, but others, including exotic-leveraged and ETFs, may require daily monitoring.”

You can get into a lot of trouble if you don’t understand the more specialized funds. While most are pools of money tied to stock and bond indexes, many use borrowed cash to bet on up or down movements in stocks, bonds, commodities and currencies.

AARP sues Wells Fargo, Fannie Mae over reverse mortgage foreclosure

AARP’s legal battle against wrongful reverse mortgage foreclosures has shifted from government regulators to lenders.

The AARP Foundation Litigation unit filed a class action lawsuit yesterday against Wells Fargo Bank and the Federal National Mortgage Association (Fannie Mae), charging that they failed to allow surviving spouses and heirs of reverse mortgage borrowers to purchase the property for the appraised value after loans came due — typically after the borrower’s death.

AARP’s litigators won an earlier round on reverse loan foreclosures in April, when the U.S. Department of Housing and Urban Development (HUD) reversed itself on a rule that was forcing spouses borrowers into foreclosure.

At the heart of the dispute is what happens to the most popular type of reverse mortgage, the Home Equity Conversion Mortgage (HECM), which is regulated and insured by HUD passes on to a spouse or an heir. The HECM is designed so that borrowers can never owe more than the value of their homes, even though the loan balances rise over time. The intent was to assure elderly borrowers that HECMs were safe.

AARP’s litigation against HUD sought foreclosure relief for spouses of deceased reverse mortgage borrowers. It charged that HUD illegally implemented two important rule changes in 2008. The first stated that the non-recourse provision would apply only when properties are sold. That meant that if the spouse dies, the surviving non-signing spouse would have to repay the full outstanding HECM balance, even if the home’s value had dropped.

HUD also changed a rule stating that a borrower could sell a secured property for 95 percent to 100 percent of its appraised value. The new rule stated that only “arm’s-length transactions” would be allowed under that range of prices. That effectively meant that a non-signing surviving spouse could retire a HECM only by repaying the full loan balance, but that a third-party buyer could purchase the property for as little as 95 percent of appraised market value.

The first AARP lawsuit alleged that, as a result of the rule, many spouses or heirs who want to purchase the property have been unable to do so because they cannot obtain financing that exceeds the current value of the property. The lawsuit argued that the rule violates other HUD rules and existing contracts between reverse mortgage borrowers and lenders, and that it negates a key purpose for which borrowers had been paying insurance premiums.

Fund managers see tough times for Treasuries

The fact that U.S. Treasury bonds managed to cling to their coveted triple-A rating this week failed to impress several prominent bond fund managers, who say they are lightening up on Treasuries and stocking their portfolios with corporate bonds instead.

Despite the debt ceiling deal, U.S. sovereign debt remains in the crosshairs of ratings agencies like Moody’s and Standard & Poor’s. The rating agencies remain concerned that the U.S. is “not doing enough to reduce spending and/or increase revenues to bring down the trajectory of the country’s mounting debt,” warns BlackRock’s head of fixed income portfolio management, Peter Fisher, in a report issued earlier this week. If the U.S. were to be downgraded by one or more agencies, he observes, “the odds are very high that there would be knock-on consequences of other borrowers getting downgraded — both corporate and public, in the U.S. and overseas.”

Robert Persons, who manages the MFS Bond Fund, believes corporate America is replacing Uncle Sam as the borrower with the strongest financial profile. He exited U.S. Treasury debt nearly two years ago and has not returned since; he asserts government bond yields are so low that the risk of investing in them just isn’t worth it.

“Companies are the ones who have fixed their balance sheets, cut costs, and generated higher cash flows,” he says. “It’s the public sector that’s dropped the ball and left taxpayers to pick up the tab.”

Even before all the debt drama unfolded, many bond fund managers weren’t enamored with U.S. Treasury bonds because of their historically low yields, which are currently hovering at about 2.6 percent for the 10-year bond.

The average intermediate-term investment grade bond fund has about 14 percent of its assets in Treasury securities, according to Lipper — less than half the 32 percent weighting in that sector for the Barclays Capital U.S. Aggregate Index, a benchmark for U.S. investment-grade debt.

A number of fund managers with the flexibility to pick their spots in the bond market had little or no exposure to Treasury securities before the debt debacle, and have no plans to up the ante any time soon.

Job creation: Fixing America with an infrastructure bank

We have iPhones, iPods and iPads. Why not an “iBank?”

This wouldn’t be an electronic gizmo that’s obsolete in a year, though. It would be a public-private partnership to bolster America’s infrastructure. It will create jobs, cut the deficit and repair what needs to be fixed all over the country.

An infrastructure bank, or iBank, solves a lot of problems without busting the budget. Instead of providing direct government grants or earmarks for specific projects, loans are made by a government-banking entity.

The U.S. is inexcusably late to the game on this time-tested idea. The European Investment Bank has financed some $350 billion in projects from 2005 through 2009. China spent 9 percent of its gross domestic product — also roughly $350 billion — to build subways, highways and high-speed rail in 2009 alone. Brazil invested $240 billion over the past three years.

The idea is not without high-level support. President Obama recently called for the creation of an iBank. In backing a U.S. iBank, Senator John Kerry of Massachusetts testified last year that “a national infrastructure bank will make Americans builders again.”

If the iBank became reality — and really it’s a necessity to compete in a globalized economy — there’s no shortage of projects. According to the American Society of Civil Engineers, more than $2 trillion is needed to fix U.S. bridges, dams, waterways and wastewater plants.

The sheer scale of a big fix is staggering: Some 69,000 bridges need to be repaired. The outdated electrical grid needs to be modernized everywhere. You can build solar plants and windmills all you want, but if you have no power lines to transport the electrons from the deserts and plains, you’re whistling in the wind.

The road to electronic health records is lined with data thieves

The following is a guest post by Reuters contributor Constance Gustke. The opinions expressed are her own.

The future of your personal health information involves gigantic Internet-driven databases that connect you to doctors, health information and services no matter where you are and what time it is.

With a big push from President Obama, who wants secure electronic health records for every American by 2014, many health insurance companies, hospitals, private practices and pharmacies are already delivering some patient portals using these records as a backbone.

It’s the future of medicine, says Dr. Raymond Casciari, chief medical officer at St. Joseph Hospital in Orange, California, but for now, he adds, “We’re still in the dark ages.”

The portal approach is intended to be beneficial, letting you share key medical data instantly with your family and consult with specialists on another continent. It’s supposed to lower healthcare costs and provide better services. But the data being stored is sensitive and so far it isn’t very secure, say experts. So it’s important to know how your medical information is being shared and managed, especially as access explodes.

Dr. Deborah Peel, a psychiatrist and founder of Patient Privacy Rights, is dubious about patient medical privacy on portals. She believes that data breaches can have harmful effects, including medical discrimination. “Today, we can’t see who uses our electronic records,” she warns. “And they can be back-door mined.”

8 ways the super committee is not super for retirement

Social Security and Medicare will be in the sights of the Congressional “super committee” that will be looking for $1.5 trillion in federal spending cuts under the terms of the debt ceiling agreement. That means the financial security of seniors and Boomers nearing retirement will be on the line, so let’s consider the outlook for these vital programs as the negotiations get underway.

If the super committee can’t reach agreement — or if Congress rejects its recommendations — automatic spending cuts would be triggered, with Social Security, Medicare and Medicaid exempted. So a stalemate would mean status quo for the “big three” entitlement programs. But if the committee reaches agreement on a deal with no tax hikes or new revenues, all three programs could would face dramatic cuts. The committee must wrap up its work by November 23, and Congress would have until December 23 to vote.

Democrats and Republicans must nominate the super committee’s 12 members by August 16, and the selections will offer the first solid indications on how retirement benefits might fare. Early indicators aren’t encouraging.

Republicans have already made clear that all its nominees will come from the ranks of tax hawks looking for spending cuts only. And the list of Democratic front-runners include several members of the Gang of Six, a bipartisan group of senators that offered a $3.75 trillion deficit reduction plan last month that included Social Security benefit cuts.

The super committee will need a simple majority to issue recommendations to Congress. So, unless the Democrats appoint six members strongly committed to protecting entitlements, a majority could very well support cuts to Social Security and Medicare. And the White House has already signaled its readiness to cut these benefits as part of a grand bargain during the debt ceiling negotiations.

Here are eight ways that the the super committee’s work could hurt retirement security:

1. By considering Social Security at all. Social Security shouldn’t be part of the deficit reduction debate. The Social Security Trust Fund (SSTF) runs a surplus and doesn’t contribute a dime to the deficit. Yes, the SSTF has a long-range problem in that it is projected to run out of money in 2035, at which time Social Security could fund only 76 percent of benefits. We need to fix that, but it’s not a deficit problem.

Overworked Americans don’t take all their vacation time

Getting a lot of out-of-office emails and feeling some vacation envy? You may feel like you’re the only one left in town during these dog days of summer, but that’s not the case.

Paid vacation leave is the most widely available perk for employees, accessible to 91 percent of full-time workers, according to a new study on employee benefits from the Labor Department. But a new infographic on “The Overworked American” by the web magazine Good (click here or on the image at left to get the whole infographic) points out that despite these benefits, 36 percent of workers don’t use all of their allotted vacation days and a similar number take less than a seven-day vacation when they do step away from their office.

How do you stack up? Take our poll:

Do you plan to take all your vacation time in 2011?

• Yes
• No