Tag Archives: bonus

Beware Get-Rich Schemes That Are Too Good To Be True

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It is good to be on-guard against Get-Rich Schemers and Their “Money Making Programs”. They usually claim to have the secret to making money fast with very little effort or time. Usually there is a catch if you look closely.

One get-rich scheme for seniors that was somewhat curious but did not have an obvious catch appeared some three years ago. Terry Savage in the Chicago Sun Times is describing how those seniors are now facing a devastating future. His article describes how a Risky insurance plan has seniors spinning with many now on the hook for huge loans – and taxes.

The arrangement was called “Spin Life”. Agents encouraged older people to take out huge life insurance policies on themselves, even though they didn’t need the insurance and couldn’t afford to pay the premiums. Investors would lend them the money to pay the premiums for the first two years, until the policy was past the “contestability period.” Then the policy would be sold to an investor, who would continue to pay the premiums, hoping to collect on this “bet” on the senior’s longevity.

Somewhat macabre but the senior citizen was tempted by an upfront “bonus” – ranging from thousands of dollars to expensive cruises — just for letting the investor bet against the insurance industry’s mortality tables and eventually collect the policy proceeds when the senior died. They were promised more money when the policy was sold after two years to investors. In some cases, the insurance companies decided that the insured should guarantee at least 25 percent of the premium loan but the seniors were assured there was no risk since well-known names in financial services were raising money to buy these policies.

With the credit crunch, the pools of investor money predicted to buy these policies has dried up and there is no money to complete the deal. Even if the insurance companies forgive the loan, the senior is liable for taxes on the forgiven loan.

To simply walk away from this deal, the policy buyer would owe huge sums – half in guarantees to the lender, half in taxes to the IRS. Or the senior could keep paying the large premiums hoping to find a buyer who would pay something for the policy with a large payout when the senior died. That’s a no-win situation.

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No Banking Bonanza And No Bankers Bonuses

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Bank Bonanza? Forbes Says Don’t Bet On It

Earnings season won’t be an apocalypse. But boom times? Hardly.  Don’t let a little accounting change fool you; banks will still struggle to eke out profits this year.  Rising loan defaults and the gloomy economic conditions are largely to blame, despite factors seeming to work in banks’ favor.

It may be that Forbes is missing the big picture.  After all we have just had the G20 summit.  The world’s press has given a largely positive reaction to the G20 summit’s efforts to tackle the global financial crisis.  But some newspapers express fears that the G20′s measures do not go far enough.

The London-based Financial Times described the detail on future fiscal stimulus and cleaning up the banks as “disappointingly thin”.

The weakest part of the package is the financial element. Banks are still gravely wounded. The financial crisis lit the fuse for this recession. It may also prolong the fire; the crisis will last much longer if major countries refuse to clean up their banks. Given the range of countries at the G20, a one-size-fits-all bank rescue policy was never feasible. But the absence of detail about a common approach to cleansing the banks of their toxic assets is extremely disconcerting. Stating vague commitments only serves to create fears that little substance lies behind the words.

Here is a brief rundown of the measures announced at the G20 meeting in London on April 2:

  1. An additional US$1.1-trillion program to restore credit, growth and jobs in the world economy
  2. To increase regulation and oversight to important financial institutions, instruments and markets, including hedge funds, and to focus regulators on “macro-prudential risks”
  3. Financial Stability Forum is renamed the Financial Stability Board and given wider mandate to promote financial stability, set financial guidelines and collaborate with the IMF
  4. Endorse and implement the new principles on pay and compensation and to support sustainable compensation schemes
  5. To take action against uncooperative jurisdictions, including tax havens
  6. To extend regulatory oversight and registration to credit-rating agencies
  7. To refrain from raising new barriers to investment or to trade in goods and services

Items 3 and 4 in that list may well have real teeth.  There is public outrage at the details that have been revealed about bonuses and the circumstances under which they are often awarded and paid out.  One might have hoped that corporate governance and individual morality might have made such bonuses the exception rather than apparently the rule. 

In that light it is most satisfying to see what Henry Mintzberg is writing on Executive Compensation: It’s time to call the bluff of those highrolling CEOs.  He is the Cleghorn Professor of management studies at McGill University. He suspects that when it comes to executive compensation, corporate boards are finally ready to take a stand.  He offers the following win-win advice:

Dismiss out of hand, without one second’s hesitation, any candidate for a CEO position who seeks a compensation package that would single him or her way out from everyone else in the company. In fact, terminate discussions immediately at the mere mention of the word “bonus.”

These prove the candidate has no business running a business of co-operating human beings. (Should this person not comprehend, cite his or her mention a few moments earlier of the importance of “teamwork,” and how “people are a company’s greatest asset.”)

This proposal will save tons of money and send a positive signal to everyone else in the company for a change, and the firm might just end up with a CEO who is a real leader. Imagine that.

Great advice.  It is a sad commentary on business when such wise words will be seen to be somewhat provocative. 

Nevertheless the outrageous behavior of some members of the financial communities in both the USA and the UK and the global publicity about them mean that the world can never be the same.  Banking bonanzas there may be in the future but it is essential that all stakeholders benefit rather than just a privileged and unworthy few.

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Bonus Bonanza – Apologies For The Error

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Bonus Bonanza is the most used cliché in the past week and the word bonus is clearly a word to be avoided if a value above $1 million is attached to it.  It will undoubtedly bring with it the eyes of the world assuming inappropriate behavior.

I rarely follow the fire trucks to watch conflagrations but I could not forbear to write this post.  Given the previous post, which showed the amount of stimulus funds going to US senior citizens was less than the amount of bonuses going to AIG executives, I found my data was erroneous.  This was a common error since now apparently AIG documents show a higher total for bonuses.  It seems that bonuses ‘showered like confetti’ according to the Connecticut Attorney General.

Richard Blumenthal, attorney general of Connecticut says he is asking insurance giant American International Group Inc. why documents appear to show the company paid $53 million US more in bonuses to its financial products division than reported earlier.  These documents obtained by a subpoena show AIG paid $218 million US in bonuses to employees in a division blamed for much of the company’s troubles, not $165 million as previously disclosed.

The House of Representatives has now passed legislation to try to recoup the payouts. The measure would slap a 90 per cent tax on any bonuses received in 2009 by top executives at rescued companies.

Seniors’ meals versus AIG bonuses.  It brings to mind the ill-fated Marie-Antoinette at the hands of the citizenry after her suggestion, Let Them Eat Cake.

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A Good Solid Bank You Can Trust

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With all the headlines on the somewhat questionable behavior of bankers, particularly in the US and the UK, you might wonder where on earth you might find a good solid bank you can trust.

Googling trust, bankers and bonuses you tend to turn up items like that in The Herald in the UK entitled Betraying trust, blighting lives, bagging bonuses.  That is certainly not an article to give you comfort.

The City of Glasgow Bank debacle of October, 1878, was a catastrophe for Scotland, wiping out 10% of the country’s banking capital at a stroke. In an age of unlimited liability, it also destroyed shareholders.

…

Yet as the writer James Buchan  described, the City’s directors had “appeared to be sound men, of a certain age, severe and whiskery of face and sober of dress, pillars of their kirks and Masonic lodges”. On paper, their bank was solid. Paper was its only foundation.

As one of the Vancouver Sun op-ed items this morning signals Wall Street shenanigans put spotlight on bogus bonuses.

But like any good thing, bonus systems are vulnerable to misuse and outright abuse. In 2008, while the global economy was heading south in a hurry, Wall Street bankers and investors pocketed $20 billion in these little extras. Some of this money will come from American taxpayers, who footed the bill for financial industry bailouts.
…

The best employees are those who understand the importance of customer satisfaction and also the importance of good judgment and ethical behaviour.

Thankfully there are still apparently some good solid banks that deserve your trust.  The Washington Post suggested there were Big Lessons in Finance From a Little Bank You’ve Never Heard Of.

Kim Price is the president of Citizens South, a 104-year-old community bank with about $800 million in assets, 15 offices and 150 employees in Gastonia, N.C.  Citizens is among the stronger and more conservative banks in the Charlotte market.

Price came up with the ingenious idea that Citizens would use its federal bailout money to offer below-market mortgage rates with no closing costs to consumers who would buy a house, or a house lot, from builders and developers who had borrowed money from Citizens. Last week, Citizens launched its $20.5 million program, in collaboration with its builder-developer customers, offering 30-year loans with an initial teaser rate of 3.5 percent for the first two years, rising to a fixed 5.5 percent rate (the current market rate) for the balance of the loan.

Citizens wins because it lowers the risk that it will have to write off even more of its commercial loans while taking a modest step to help stimulate the local economy.  In truth, Citizens won’t literally be using its federal bailout money to make these mortgage loans. What each dollar of government capital does for Citizens, or any other bank, is give it the ability to go out and borrow another $9 from depositors or the Federal Home Loan Bank at a rate of 2.5 percent or less.

Now that is a good solid bank you can trust, which is thinking of how to best cover your banking needs.  What more could you could wish for.

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