Meltdown

Published by John Wiley & Sons
Lance Wallach

Muhammad Ali: Superman don’t need no seat belt.
Flight Attendant: Superman don’t need no plane, neither.
The U.S. financial system meltdown has grimly scythed decades of accumulated business profit, investment, and personal wealth. As we have seen, investors undervalued their own rationality and overvalued chaotic wealth management schemes masquerading as complex asset management in a global economy. Investors dumped business earnings, pension assets, and personal funds into investment portfolios without due diligence as to the logic and structural soundness of those investments and their strategic economic orientation.
Counterintuitively, many wealthy investors and business owners took leaps of faith with hard-won assets into complex investment schemes they didn’t understand because returns were bountiful. The hard work processes by which investors grew their businesses or their wealth did not seem to apply to strategically marketed programs devised by Wall Street wizards. “The wizards must be smarter and more inventive” was the mantra. It was an era where not paying attention yielded robust earnings.
The Party’s Over
The charlatans have now been revealed and returning to earth awash in lost assets has been a hard lesson learned for many business and personal investors. Fear of any kind of strategy beyond the most basic principles of accounting math has turned financial markets into rigid, ossified institutions. Credit is tight; doubt is rampant. But fear need not overtake common sense. If one is strategically poised to act, there are methods to reap opportunities even within the constant inhalation of a bad news economy.
There are ways to maximize wealth assets through sound tax strategies aimed at reducing exposure to IRS audits, while freeing liquidity for further investment income growth. Part of the picture is understanding what the U.S. government has and has not done in the financial sector.
The U.S. government failed to regulate its own legislative loosening of the credit and investment markets. The government allowed financial businesses that previously dealt in single issue items, such as credit allocation (banks), insurance (insurance companies), and tax protection (accounting firms) to become full-service investment/banking/insurance hundred-headed hydras. With the ability to manipulate different asset classes, many of these businesses grew astronomically by forging new markets out of fringe niches and clients they previously would not have pursued.
Much of the growth was built on Ponzi-type schemes of trading one asset class for another, rebundling (while claiming it was an asset protection maneuver), and charging transaction and management fees for transferring and translating assets into different holding tanks. Ethical portfolio diversity became a joke.
Forensic auditors will spend years trying to unravel the origination of lost portfolios and their mutation into worthless products that propped up marketing schemes.
We All Know the Result
Because the government was involved in allowing multipurpose financial institutions to pursue growth by any means necessary, the government now stands confused, dazed, and unable to act under the fallout from the variety and volume of reckless financial transactions it helped perpetuate. In fact, it is throwing more money into the hollow house called Wall Street, assuming that the perpetrators will suddenly ethically encumber themselves and fix the problem.
Meanwhile, the Security and Exchange Commission (SEC), the so-called regulatory agency of the U.S. financial system, is like a lost orphan, its budget miniscule in comparison to the largesse tossed to the big dog bankers and their pals. Shouldn’t the budget allocation be the opposite until we have reviewed and identified the malfeasance that brought down the system?
There is another looming storm on the horizon that could swamp any economic lifeboats sent out into the water by the government. There is the potential for a catastrophic failure of retirement funds in the United States, affecting nearly one-third of the pension plans existent. With baby boomers set to retire in massive numbers, such a failure would further erode a weak, destabilized economy.
In 2006 Congress passed the Pension Protection Act, mandating that companies with defined benefit pension programs be fully funded, as measured by the ability to pay out money to all retirees should the latter decide to withdraw their accrued assets. Of the 500 largest U.S. companies, more than 200 do not meet the Pension Protection Act standard in 2009.
Standard & Poor’s 1500 Index of corporations reveals how dire the situation has become: The Index corporations moved from a $60 billion pension plan surplus at the end of 2007 to $409 billion deficit before the end of 2008. Defined benefit pensions (usually, where an employee payroll deduction is matched by the company into the employee’s retirement fund) at these companies are part of a potential nightmare scenario even in good economic times, and we are entering an undefined period of economic uncertainty and groping in the dark.
When revenues decline in an economic crunch, payroll must be met at salaries that haven’t declined. In the worst situation, a company may have to decide between meeting payroll and matching payroll-defined pension requirements. Corporate pension funds are troubled and clearly face the problem of underfunding. Many of the corporate pension funds invest their money conservatively. There are, however, a group of pension fund managers who have not invested conservatively or wisely and they are the first wave of a larger pension fund tsunami that could catapult the U.S. economy into a stunning freefall.
The snowball rolls downhill: jobs are cut, stocks consistently trend downward, reducing a company’s investment stream, destabilizing the stock market and the company’s ability to remain productive or even solvent.
Public pension funds and federal retirement accounts hold approximately $3.5 trillion in their accounts. There is another $1 trillion in unionized corporate workers who are part of the management team deciding fund investments. Together, these funded retirement vehicles cover approximately 27 million Americans and account for more than 30 percent of the U.S. retirement pension fund system. A failure of 30 percent of the system would be catastrophic to United States and international markets and to the personal retirement benefits of the invested potential pensioners.


Lance Wallach, National Society of Accountants Speaker of the Year and member of the American Institute of CPAs faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters. He speaks at more than ten conventions annually and writes for over fifty publications. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education's CPA's Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Mr. Wallach may be reached at 516/938.5007, wallachinc@gmail.com, or at www.taxaudit419.com or www.lancewallach.com.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.