Financial Crisis Alternative Solution – Maybe!!

September 30, 2008
 Financial Crisis Alternative Solution – Maybe!!

The exact inside workings of the “Financial Crisis” I am not fully aware of. Options, sub-prime mortgage alternatives, derivatives and the other likely investment vehicles from the news media seem to be staggering.


I have not heard any specific “free-market” alternatives issued to solve the problem.

Here is my solution based upon the free market:

* Have investors draw money out from their IRA, Roth IRA and pension plans for a sub-prime mortgage investment.

* For maximum risk reduction limit the sub-prime mortgage exposure to 10-20% of the total portfolio value. (It would be more prudent to limit the exposure to 10% or even 5%.

* The limitation of the investment allowed would be a maximum of $20,000. This would allow enough of an investment by an individual who does not have that much in but wants to take a higher risk because of the low amount in the account.

* A new mutual fund industry could exist or in some fashion or like Fannie Mae or Freddie Mac.

* For reduction of risk exposure assumes the value of the investment will fail. Structure the dividend or interest income return so the value of the account will remain even with no return. This is the same technique which is used with high risk investments but with the other portion of the portfolio being in guaranteed no-risk government bonds. The interest from the bonds would over say ten years yield a return on investment equal to the loss of the account. This would affectively zero out any loss from the account but obviously would not return any investment return as well. The observance of BETA management should be strictly accounted for. Examples of rounding out a portfolio through Collar Investing as outlined by Thomas J. Schwab of Summit Portfolio Investing, LLC may be a good strong way to reduce risk and be aggressive at the same time to help in reducing risk associated with aggressive portfolio management and also lowering the risk aspects generally associated with high risk investment portfolios in other portions of the investment portfolio.

* To offset this potential risk factor the U.S. Government would give an up-front 10% tax credit.

* The tax credit if the investment was inside of an IRA or Roth-IRA or Pension Plan would be able to be taken off on the individuals personal income tax return for 2007 or 2008. The reason for the 2007 is to stimulate activities from an amended return (I do realize that the IRS is loaded down with over 1MM amended returns at the present time from the Economic Stimulus Payments as well at this time.) Or a separate 1040-IRA could be filed at the rate of 15% by the government. The trustees would submit a separate form for the pension holders. An election would be submitted to the sponsoring company if the 2007 was elected. Otherwise the normal course would be for a 2008 tax return for the credit amount.

* If after five years the investment failed then the government would come up with another 10% tax credit or when the investment was sold. The credit would go to the IRA/Pension in this case instead.

* At withdrawal the increase in value of the account would be considered as part of the basis and no income tax would be due on early withdrawal.

* If early withdrawal did happen then no 10% penalty would be accessed against the portion of the interest gain. This would be allowed if the IRA/Pension amounts were kept separate either from an accounting standpoint by the Pension trustee or the IRA trustee. An individual could keep the information separate by opening a separate IRA or Roth-IRA account. If the later is done then the IRS would pay the first five years of the IRA account fees through a tax credit.

* Use of the funds when withdrawn could be used for home construction of solar cell panels on a home. If additional funds were needed beyond the basis and interest income of the invested sub-prime mortgage funds then these funds could be withdrawn without a 10% penalty and the with additional funds would be taxed at the capital gains rate rather than the ordinary rate for the cost of the domicile primary residence solar cell panel investment only.

* The objective here is to leave out the government or at least as much as possible. Tax credits would act as a social manipulation and stimulus.

* This style of stimulation would also leave funds with the United States government to stimulate other sources of alternative energy. An example of this would be the funds could be used to create a 20 X 20 miles solar cell farm in the Arizona or New Mexico desert. Maybe even an algae farm of equal size for the creation of an alternative source of biofuel created from algae. Is there a river close by.

* The available source of Pension, IRA and Roth/IRA funds would not distract from returns on investment but rather a stimulus of ownership would be crucial in resolving world markets. A solution without the possibility of the government going broke would stabilize world markets. This also could stimulate employers to release additional funds to a pension plan because of the enthusiasm of the employees. A restriction of investment through employers pensions could be made if the pension is less than 100% funded. This would be true if the funds were from a defined benefit plan for the tax credit of course.

* Additional funding sources could be from Annuities. A restriction of the March 2007 date may need to be imposed to not allow investment of funds just to get a personal income tax credit.

* Ease of the withdrawal requirements from these types of investments would need to be put in place also. Withdrawal of funds after April 1 of the 70 1/2 birthday would not be calculated for the RMD (Required Minimum Distribution) until after the maturity or the refinancing of the underlying mortgage. Two options would be needed for this calculation by the trustee. Either after all mortgage backed sub-prime mortgages would have to be liquidated (this test may need to be age sensitive) or with a minimum of 5% per year for the withdrawal. Assuming a 20 payout. The other alternative would have to allow a February 15th calculation by the trustee and a withdrawal of additional funds by March 30th for the request. If funds would need to be re-deposited in a 60 day window from April 15th should be allowed. No late fees or penalties for the requirement. Thus older taxpayers would need until June 15th to file their income tax returns.

* States may need to comply and modify their income tax filing seasons and requirements. Most states for state income tax returns take the numbers from the federal returns for purposes of pensions and IRAs. The 10% penalty is usually a percentage of the federal amount. California takes an additional 2.5% of the penalty as an example. Capital gains treatment of pension or IRA withdrawals would need to be changed in the state laws to conform with federal treatment. Federal laws could be adjusted to change the reporting of the capital gains portion under Schedule D rather than the Form 1040 page 1 section. This may be difficult for a federal requirement but the asset would have to be held for one year anyways.

* Again, from the mortgage side of this mess I can see a huge problem but I do not see as much of a down side with this type of a plan as I do with the one-owner concept of the federal government. Administration of existing mortgages would remain a constant. The citizens and world markets may be able to participate in this style or structure of investment. IRA or Roth/IRAs may be considered for foreign investors. If funds were input into a Roth/IRA format and kept separate then a no tax credit would be available for the foreign investor but a maximum of $125,000 could be invested. This would be in essence a foreign cushion and if they are over 59 1/2 at the time of the withdrawal no income tax would be do. An additional withdrawal of the interest and Roth/IRA would have to be allowed due to the restrictions on withdrawal at the border of $125,000 at the present time due to estate tax purposes. Relief of the withdrawal of $10,000 of reporting would have to be waived for transfers of funds out or into the country as well. The 10,000 restriction is in place to detect movement of terrorist funds. An individual to trustee or bank to trustee account should meet this requirement and the receiving trustee would make the appropriate declarations.

* Amounts above the 10% and not inside of an IRA or Roth/IRA up to 20% of ones investment portfolio could be invested in these sub-prime mortgage back securities and the tax treatment would be that of an insurance policy. The maximum amount would could be included would be $10,000,000. The estate tax treatment would be tax free and the gift tax per year would be tax free for the interest income portion.

Let’s knaw on something like the above and keep the government solvent. Many individuals bearing the risk spreads the risk and lowers the individual percentage of loss. We have had numerous large company merge due to large collective amounts being in one place. The last thing we need is for the largest organization to go under. A 5% or 10% loss over ten years by many is less than one large organization which we all depend upon going under. The safer investments from the many will come out even with risks spread and no equity lost or gained over time. The loss by one which depends upon all of us contributing for its stability would be catistrophic for all.


Keith Ljunghammar, EA





Thanks God!! A mortgage failure silver lining??

September 25, 2008
Thanks God!
What else are we supposed to do when the mortgage finance industry goes down. What else are we supposed to do when the New Orleans levies break. What else are we supposed to do when hurricanes smash our cities. What else are we supposed to do when Indonesia, etc gets smashed by a tsunami. What else.
Are we supposed to sit back and assume this is part of God’s taxing system.
When the IRS wants to get taxpayer’s attention they take bank accounts, garnish wages and generally cause mischief. Has God really been trying to get our attention. Or is there some other plan which is being dealt to us.
When the IRS does get our attention a plan of repayment is devised. The full payment over a series of months or years. The IRS does not want to take our possessions but merely to get our attention so the non-payment issue can be addressed and eventually satisfied.

The mortgage sub-prime situation is this different or about the same. I heard today that in some areas of California where a large population of illegal immigrants live that over 25% of the subprime paper involves illegal immigrant underpayment or foreclosure proceedings. One may consider this to be the problem but the other 75% is still there so the problem would still exist if the 25% illegal immigrant portion did not exist. So I will be discounting the 25% as not being the cause.  The illegal immigrants would have been encouraged and not discouraged in getting a mortgage.  The legislation is not the fault of the illegal immigrant but the shame, shame of the legislature and the mortgage industry.   Yes, part of the problem but not the cause.

There has to be some other portion of the macro economy which is the cause. Credit card interest rates, adjustable rate mortgages, no income verification, unethical mortgage lending practices, fraud, high interest rates in comparison to levels of income, credit scores, etc. Yes, all of the above.

One thing I see as a cause is the change in legislation two years ago. The bankruptcy laws were levied at individuals for payment of credit card debt for a 5 year period of time. In the meantime prior to bankruptcy credit card interest rates were increased substantially from a maybe normal 8 – 15% interest rate to a 29.9% interest rate if another credit card was missed. The missed payment could have been from a credit card in dispute or a mortgage which was a little bit late or from a credit card companies policy of processing incoming mail at a snails pace so late fees could be charged. Disputes from another credit card thus would not be allowed in this situation whereas prior to this legislation they could be disputed and non-payment would be allowed. Double jeopardy thus was allowed to the punishment of the consumer.

No, I would not say that God was responsible for creating the mortgage industry or credit card issuer meltdown. It is either as a result of unethical power brokers in business and the mortgage and credit card industry tied with the legislative greed of the Congressional Leaders and Senators of the elected official of the United States.

Should anyone have warned of this poor legislation. Keep your ears tuned to the news media for a completely biased report on what is and has happened during this Presidential Campaign Season. Corruption and politics was the payoff and now the results have come home to roost.

Although I am sure that God has noticed this meltdown the meltdown was not His objective. Getting rid of the corruption and the bickering in the Legislative branch and having the Godly solutions put back into place was the objective. Now the question is who will pay for the solution and what should the solution be.

My solution. The legislative branch of Congress has been talking about a $700 Billion dollar bailout. I hear the legislature saying they will buy out paper which is or has been defaulted on at a deep discount. But really this is not punitive to the unethical and unscruptulous finance industries. In fact I believe some of the financial portions of the finance industry may have bought fraudulent paper without their knowledge and thus would be innocent and financially burdened as well. I would take the credit card interest payments which are in reality part of the problem in the mortgage industry due to the bankruptcy law change legislation and force all of the credit card companies to replace the interest rate charge for up to six years back with a across the board six percent interest rate. Eliminate all of the penalties of any kind. The difference then would be used to reduce or eliminate the credit card bill which the credit card holders would have. Any excess would not go back to the consumer but would be used to eliminate other credit card payment amount from other issued credit cards. The reduction would be even if the consumer was unable to pay the credit card interest rate. But the credit card bill would only be allowed up the the zeroeing out of the credit card or mortgage interest owed.

There. My solution. Punishment of greed must be paid for. Caution in lending must be back in vogue. Unethical and fraudulent practices even if legal need to be punished and unscruptulous lenders eliminated from the financial industry.

So the silver lining might be that our differences are eliminated and the Congress can finally start to work together and not bash each other.  My legislation is better than your attitude has got to stop.  What is good for the citizens is why we have elected officials in the first place.  In 1776 everything suddenly came together when they prayed.  Maybe a stronger practice of prayer would be a good solution for this problem.  A little bit of a higher pay grade sometimes (always) is needed. 

My Financial Planning Viewpoint

Keith Ljunghammar



Financial Disaster

September 17, 2008

The current path to Financial Disaster seems to be imminent.  Today the Fed did not raise the interest rate.  This seems to be a repeat of what happened in the President Dwight D. Eisenhower era.  But the economy was stable during that time and President Eisenhower wanted stable interest rates so the Federal Interstate road system could be built at a reasonable cost. 

Normally interest rates are raised to either 1)  Stave off inflation or 2)  Create an incentive for foreign investors to bring foreign currencies into our markets in order to stimulate the economy.

If we have inflation – well our prices at the pump are going down because our economy or the strength of the dollar is a little bit better but we still need a lot of strength in our currency.  When I am talking with taxpayers they still have not seen a turn-around for them personally in the economy.  New jobs have not been created lately but jobs are on the decrease.  This is only from a recent vantage point however.  I am not seeing any signs of inflation as of the last two months. 

If I was a foreign investor would I put money into U.S. currency or into another foreign currency.  The dollar rate between foreign currencies and U.S. currency has been getting closer as of lately.  Some currencies have been remaining relatively stable between the U.S. and the foreign currency.   Canada has been having a wider spread.  If the dollar increases in value the Canadian currencies decreases in value.  Canada’s economy is extremely dependent upon wood, natural gas, and oil.  As the price of gas goes down the price of the Canadian dollar goes down against the U.S. $.

I believe in the economy everyone should be looking at solid industrialized currencies even if only an investment in a bank CD is the ultimate individual investors objectives.  As our world shrinks our needs to know what is happening must expand.  No longer can an investment or should I say a stashing place for cash have no due diligence basis.  Every aspect of the investment field is suspect to needing a knowledge base and a complete understanding of the integral variables in other types of mobile investment strategies.  This strategies of speculative, junk status, emerging markets, gold, other metal, commodities, derivatives, options, futures, real estate, land, tax liens, and etc. all are part of what the banks look at when determining what the CD rate will be.  Then again add the same mix put from every major country in the world and how their economies are moving.

With the recent disasters in the Mortgage, Investment Banking, Banking, and soon to be Life Insurance fields caution is all around us. 

If another bank fails I believe it will be purely from a bank run and not a balance sheet bailout problem. 

WAMU has a CD for 8 months @ 4.25%.  Is this a warning sign or is it a way to get fixed cash amounts into the bank.  Are they expecting their balance sheet to have problems for the next six months and then everything could be great after that.  Or do the banks need to publicize their income and profit reports monthly and the balance sheets monthly for assurances to the banking investor of the solid nature of a particular bank.  Then again I do see other banks offering something similiar to this also.  FDIC insured to $100,000 and FDIC insured to $250,000 is just fine but if insolvent I believe no interest is paid for about 6 to 9 months.  And if it is then it does or would take about six to nine months for the FDIC sytem to straighten the system out. 

I really do see this entire system being created by Senator Biden and his change to the credit card system.  After the bankruptcy change old credit cards which were not submitted to the bankruptcy system would have had a large default rate.  If you cannot pay your credit cards you will pay your mortgage first.  But the credit cards now are allowed to boost your interest rate up to a high of 29% and this is even if you have not missed a payment on your credit card.  The your ARM is coming due and you try to refinance and with all of the credit card debt and missed payments many homeowners are now going to pay an extra premium because of their credit cards.  A decrease in value of the credit cards and the new mortgage cannot absorb the credit card debt and then a larger interest rate is charge.  Can’t refinance and can’t sale a home.  This really does sound like stalemate from a chess players standpoint.  But this is not just a game. 

My solution would be to undo the credit card debt laws and eliminate the credit cards.  If a law creates chaos and the law was lobbied by an institution then the instituation must pay the price.  If a taxpayer cannot repay credit card debts and redo a mortgage then the credit card debt should be completely forgiven up to the point of the new re-assessed value of the house. 

The IRS has values and formulas for basic standards of living.  These formulas could be used as a backup in determining if a taxpayer is insolvent.  The bankruptcy courts also use a system to determine if someone is insolvent.  This could be used as well. 

The assumption when the house of purchased was that the homeowner would be able to pay the mortgage with everything being equal.  Whether the homeowner was under a 30% or a 35% or a 50% or higher income equation on the original mortgage then this could also be the criteria for determining the value of the amount which should be required to be paid.

Watch out for the falling economy even if you are only investing in CDs.

I thing before this is all done foreign governments will have to send money to U.S. credit card holders.  They probably would have to send this to credit card companies as gifts to pay off maybe $2000 in credit card debt to the creditors.  Above that the debtor would have to pay.  For instance, it may be in China’s best interest to get the U.S. economy going again by sending money to the U.S. so they can keep their people employed.  Just a thought and I doubt this will happen.

Maybe a mattress is the only sound investment these days.

IRS Tax Forum Seminars

September 7, 2008

Will be going to San Diego for the IRS Tax Forum Seminars

I guess, if you want to know anything about what is new from the IRS you can pose a direct question and I will try to ask one of the IRS people what the answer might be if I get time to get back to the internet.  Or just ask any other type of question so I can answer it.