Sunday, January 10, 2010

Pending changes to money markets, 401k, and IRAs

With an eye to the lengthy post, I'm presenting the summary first: the Federal Government, in a joint effort by the Treasury Dept & Labor Dept, is proposing to permit freezing redemptions of money markets, 401ks, and IRA accounts - the latter two by converting them to annuities.

What this means to you:
A) no option to redeem your IRA/401k account (I believe the current penalty is 10% plus income tax paid)
B) forced conversion to Treasury bonds - which are at historically low yields (the 30yr is 4.375%)
C) the US Treasury issued $1.2 trillion in bonds in 2009 - of which the Chinese only bought $200 billion and other foreign buying was less than that. This means nobody is buying our crap paper but we have to issue even more than $1.2 trillion in 2010 - somebody's got to buy that stuff. Oh, and in December 2009 Moody's put the US on a watch list for possible downgrades. When an issuer gets downgraded, they have to raise rates to attract buyers - unless they have a captive audience.

Bloomberg: Retiree Annuities May Be Promoted by Obama Aides
The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams[.]

[Ed. note: It's also a very handy way to drum up demand for the flagging US Treasury market. And the ensuing equity market crash (which will happen when all those 401k & IRA income streams get diverted from the equity market to the bond market) will drive even more investors to Treasuries.]

Zero Hedge - This Is The Government: Your Legal Right To Redeem Your Money Market Account Has Been Denied

Money Market funds, which account for nearly 40% of all investment company assets. The next time there is a market crash, and you try to withdraw what you thought was "absolutely" safe money, a back office person will get back to you saying, "Sorry - your money is now frozen. Bank runs have become illegal." This is precisely the regulation now proposed by the administration. In essence, the entire US capital market is now a hedge fund[.]

And Zero Hedge's conclusion:

What we will know, is that now i) the government is all too aware that the market has become one huge ponzi, and that all investment vehicles, even the safest ones, are subject to bank runs, and ii) that said bank runs, will occur. It is only a matter of time. And just as the president told everyone directly to buy the market on March 3, so the SEC, the Group of 30, and Barney Frank are telling us all, much less directly, to get the hell out of Dodge.

Jesse's Cafe Americain: Obama Adminstration Wants To Annuitize 401k's and IRA's - Mandatory "R Bonds"
My model for thinking about this annuitization is that the government wishes to appropriate your savings for a 2.0% return, ex fees and mispriced risk and inflation, as a source of funding for the bailouts of an oversized and insolvent FIRE* sector (like AIG) and the imploding pretensions of a global financial elite.

Good luck.

*FIRE: Finance, Insurance, Real Estate

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