Financial life in a big town

The Federal Reserve is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 per cent target.

No one knows for sure what the Supreme Court will do with health care reform. But unless it strikes down the whole law, millions of wealthy families can expect a tax increase come January.

Two big Medicare tax changes were enacted to help pay for the new federal subsidies that millions of Americans will get when they buy health insurance. The tax changes themselves were not among the specific provisions of the law being challenged at the court.

Quiz: What the rich really pay in taxes

The new increases in Medicare taxes will apply to individuals making more than $200,000 a year, or $250,000 for married couples.

The measure, set to go into effect next year, is estimated to raise more than $200 billion over 10 years.

Roughly 4 million households — or 2.4% — will be affected by the increase initially, according to new estimates from the Tax Policy Center. By 2022 that number will grow to 8.3 million, or 4.6%.

What if the health reform mandate dies?

How much more households will pay depends on which Medicare increase they’ll be subject to since the Affordable Care Act calls for two changes. Some households will only be subject to one, and some will be subject to both.

The first involves the Medicare tax on earnings. Today, workers pay 1.45% of their wages into Medicare. Starting next year, high-income individuals will pay another 0.9 percentage points on their earned income over $200,000 ($250,000 if married).

The second change pertains to investment income, which to date has never been subject to the Medicare tax instant payday loan. But next year high-income households will start paying a 3.8% tax on at least a portion of their investment income, such as capital gains, dividends and rental income.

Households subject only to the Medicare tax increase on earnings will pay an estimated $2,430 more on average next year. But amounts vary widely depending on one’s income level. Those making between $200,000 and $500,000, for instance, will only pay about $633 extra while households making $1 million or more would pay another $11,242.

By contrast, millionaires subject only to the new investment income tax will see a much bigger tax bill, paying $38,149 more.

And — no surprise — households subject to both versions of the Medicare tax increase will get hit the hardest. More than 90% of those with incomes over $1 million fall into this group, according to Tax Policy Center estimates. And their average tax increase would top $45,000 next year. By 2022, they’ll pay $57,125 more.

While it’s easy to make the case that the wealthy can absorb these kinds of increases without much strain, that argument may not hold up as well over time as lawmakers seek to raise more revenue from the $250,000-and-up crowd to pay for any number of endeavors, including reducing deficits.

Said Tax Policy Center senior fellow Roberton Williams: "The well is only so deep." 

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European officials praised Spain

A Senate committee has approved President Barack Obama’s two nominations to fill vacancies on the Federal Reserve’s board. But prospects for a quick confirmation in the full Senate are uncertain.

The Senate Banking Committee approved by voice vote the nominations of Jeremy Stein, a Harvard economics professor, and Jerome Powell, an investment banker who served in the George H.W. Bush administration.

Obama nominated Stein, a Democrat, and Powell, a Republican, in hopes that pairing nominees from both parties could overcome Republican objections paperless payday loans. The Fed board hasn’t operated with a full seven members since 2006.

But one Republican senator, David Vitter, a critic of the Fed’s policies, has expressed opposition. That won’t necessarily block the nominees’ confirmation. But it means the Senate won’t vote before its two-week break starts this weekend.

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After botching its debut as a public company last week, BATS Global Markets issued a heartfelt apology Sunday night in a letter to customers.

"Let me get right to the point," said Joe Ratterman, chief executive of BATS, in the letter. "BATS experienced a serious technical failure Friday morning and I want to apologize for not measuring up to the level of excellence that you have come to expect from us."

The technical failure came on the day BATS had hoped to sell its own stock to the public for the first time. BATS, which operates stock exchanges, intended to list the stock on its own trading platform.

But trading in the newly issued BATS stock was halted when the price suddenly plunged almost immediately after it hit the market, triggering a so-called circuit breaker.

The Wall Street multibillion scandal no one is talking about

"On Friday we were under the brightest spotlight imaginable … opening our own stock on our own exchange for the first time ever," said Ratterman. "It doesn’t get much more public than that."

Despite months of preparation and "rigorous" testing, BATS said it experienced a "system problem" that prevented the stock from trading properly payday loans for bad credit.

Ratterman stressed that all companies have technical glitches and that BATS exchanges have run smoothly 99.9% of the time over the last three years.

"It shouldn’t have failed, but it did, and the timing couldn’t have been worse," said Ratterman.

Ratterman suggested the offering could have been salvaged if the problem had been resolved quickly. But it took over two hours to reopen the market and by then the damage had been done.

"We determined that this was a material event that had eroded investor confidence and made the timely resumption of fair and orderly trading unlikely," he wrote. "As a result, we pulled the IPO and unwound all auction executions."

BATS is the third-largest exchange operator in the United States after NYSE Euronext (, Fortune 500) and the NASDAQ OMX Group (), according to the company’s investment prospectus.

The Kansas City-based company is considered one of the largest platforms for high-frequency computer-driven trading. 

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The Netherlands, the fifth-largest economy in the euro region, no longer belongs to the core of the common currency and may face rising borrowing costs, Citigroup Inc. said.

The tornadoes that swept through Missouri last year will cost homeowners who didn’t feel so much as a stiff breeze. Home insurance rates in Missouri are rising a little more than 5 percent, according to figures from the Missouri Department of Insurance.

Illinois state insurance officials wouldn’t provide an estimate on how much homeowners premiums may be rising this year.

People in the insurance industry call 2011 “the year of the cat,” as in catastrophe. And that partly explains the rising cost of home insurance here.

Several tornadoes ripped through St. Louis: one on New Year’s Eve of 2010 and then on April 22. Tornadoes laid waste to parts of the mid-South in April, then a massive twister erased much of Joplin in May. All told, twisters killed 1,900 people last year.

The result was the fourth biggest disaster loss in the history of insurance. The $21.3 billion tornado loss ranked just short of the $24 billion cost of 9-11, $25 billion for Hurricane Andrew in 1992 and $47.6 billion for Katrina in 2005.

The tornadoes capped a decade of disaster, in which catastrophic losses of all sorts more than doubled from the 1990s. This year is also shaping up as nasty with 270 tornadoes reported as of March 5, compared to a 7-year average of 123, according to the insurance rating firm A.M Best.

Tornado losses used to be a minor headache for insurers, who were more worried about hurricanes on the coast.

“Insurers are starting to say, ‘maybe this is the new normal,’” said Steve Weisbart, chief economist for the Insurance Information Institute, an insurance trade group. “They’re building into rates a little more margin for catastrophic loss.”

They’re also trying to bolster sagging profits. Earnings for property and casualty insurers dropped about 40 percent last year to $11.7 billion as “catastrophe-related losses wreaked havoc,” according to A.M. Best.

And so, St. Louis homeowners will be paying higher prices for coverage. The Missouri Department of Insurance says that insurers covering 80 percent of homes have filed rate increases averaging a bit over 5 percent from July of last year to early this month.

That was actually lower than in previous years. “Base rates” – rates before any discounts - rose 14 percent in 2009 and 9 percent in 2010, according to Missouri Insurance Director John Huff.

Those 2009 and 2010 increases were due in part to another ‘catastrophe’ hitting insurers — poor returns on their investments. 

Investment income has taken a big hit in recent years because of low interest rates, and falling investment income was pushing up rates before the rash of tornadoes.

Insurance premiums also depends on other factors, such as the amount of competition in the market and the amount of loss claims.

Huff says competition remains strong in Missouri with 130 companies angling to cover homes.

Insurers are looking for ways to lower their disaster losses beyond simply raising rates. More are moving to percentage deductibles, under which the homeowner pays a fixed percentage of any loss, says Weisbart. That’s a step away from fixed deductibles, in which the homeowner pays a certain dollar amount with the insurance company paying everything else up to the policy limit.

In Missouri, regulators are seeing some insurers move away from coverage that replaces damaged property with new property. If an old roof is blown off, they may give the owner a check for the value of an old roof, even if it costs more to replace it with a new roof.

Homeowners have to read their policy to know that they’re getting. “It’s really up to the consumer to do their own homework,” says department spokesman David Owen.

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It’s a testament to perseverance that Ricky Arnaz Crawford reached his late 20s before the voices in his head forced him out of steady employment.

Now he’s landed in a bureaucratic snafu on its way to the Missouri Supreme Court.

The Missouri Division of Employment Security is pursuing Crawford for $3,000 – the amount of it says Crawford was overpaid while collecting unemployment in 2009-10.

Crawford, a diagnosed schizophrenic, received the jobless benefits prior to a determination by another agency, the federal Social Security Administration, that he is “not mentally capable of full-time competitive employment.”

The finding enables Crawford to collect government payments for the disabled.

His attorneys contend the state erred in calculating the alleged overpayment.

“He didn’t get any more than he was entitled to, because it was Social Security that reduced the benefit by the amount of his unemployment,” says John Ammann, the director of the St. Louis University Legal Clinic.

Further, they argue, Crawford shouldn’t be on the hook even if he were overpaid – it was the government’s mistake, not his.

“Everybody understands that Arnaz Crawford is totally innocent of any wrongdoing, and that is the legal argument that we are making,” said Martin Perron, his pro bono St. Louis attorney.

Neither the Division of Employment Security nor the Social Security Administration would answer detailed questions about Crawford’s case. The high court is expected to entertain oral arguments this fall.

Crawford’s life has been defined by two constants – family and schizophrenia. His fraternal twin Laressa Crawford, diagnosed at the age of 12, has never been able to work.

Unwilling to accept a similar fate, Ricky Crawford forged ahead, despite the at-times debilitating delusions.

The Dardenne Prairie resident landed his first job at 15 and continued to draw a paycheck, working nearly non-stop at fast food restaurants, cleaning services and retail outlets. Then in early 2009, while stocking shelves at a Lake Saint Louis Wal-Mart, a manager summoned him to an office.

“I was hearing a voice, and I was yelling at myself,” Crawford says. “A customer heard me, and I was fired.”

A spokeswoman for Wal-Mart Stores Inc. was unable to confirm the details of Crawford’s employment. 

The dismissal prompted Crawford to check himself in for a brief and voluntary stay in a mental hospital. Citing a diagnosis of schizophrenia, major depressive disorder and borderline intellectual functioning, a physician subsequently recommended that Crawford apply for disability – a request initially denied by the Social Security Administration.

Crawford appealed the ruling and applied for state unemployment benefits in July 2009 as he waited for the Social Security Administration to reconsider its decision.

Eight months later, the Social Security Administration decided in his favor.

The ruling meant Crawford was eligible for disability payments from March 2, 2010 forward, as well as retroactive compensation for the time that elapsed – a little over a year – as Social Security considered the appeal.

Court documents indicate Social Security Administration and Division of Employment Security officials calculated the amount the federal government needed to deduct from the retroactive disability payments to balance the jobless benefits Crawford accrued as he waited out the appeal process.

Social Security Administration spokeswoman Dorothy Clark said consultations between officials of the federal agency and representatives of state unemployment systems are common in resolving potential overpayments from disability and jobless claims.

But less than a month after Crawford became eligible for disability, the Division of Employment Security – as part of a larger crackdown on over-payments to the unemployed – demanded that Crawford repay $3,000.

It remains unclear whether the agencies made mistakes in calculating Crawford’s benefits. But even if they did, Crawford shouldn’t be on the hook, his lawyers argue.

“The two systems interacted. They did what they were supposed to do,” Ammann said. “You can’t go back now and change it.”

Crawford’s lawyers are challenging a portion of the statute governing unemployment law that allows the state to seek restitution “using any methods under the law,” Perron said.

“It doesn’t give them the right to demand payment when a person is totally innocent of wrongdoing,” he said.

A representative of a leading advocacy organization said Crawford is far from the first mentally disabled individual caught up in disputes with state and federal entitlement bureaucracies.

“For better or worse, this is a dual system based on two factors in conflict with one another,” said Andrew Sperling, director of federal affairs for the National Alliance on Mental Illness. “One is designed with the presumption that you are able-bodied, able to work, and therefore eligible to collect unemployment insurance. The other assumes you are disabled and presumably unable to work.”

In Crawford’s case, that conflict wound its way past several administrative law judges and labor referees before it landed on the steps of the Supreme Court earlier this year.

Ammann hopes the Supreme Court decision in the Crawford case will provide the Division of Employment Security with better direction on issues arising from over-payments and the benefits awarded to displaced workers who, as it happens, are also disabled.

Perron enlisted Ammann and the the SLU law clinic to assist him last month during the preparation of briefs the court will take into consideration as the matter moves toward a formal hearing.

For his part, Crawford wants the problem with the state to go away. And he wants to work again. As required by unemployment insurance rules, Crawford continued to apply for jobs while collecting unemployment and waiting for his appeal to be heard. He accepted a couple of offers from fast food restaurants, only to have putative employers ask him to leave when the voices returned during training and orientation.

And while the symptoms of schizophrenia remain, Crawford has battled back with a regimen of medications. His progress has increased resolve to re-enter the workforce.

His mother, also named Laressa, has no doubt he will again persevere.

“He’s a determined kid, he always has been,” said Laressa Crawford. “I envy him, because he has his goals and he goes after them.”

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A growing number of U.S. cities are choosing to fund essential services like public safety and garbage collection over making payments on their outstanding debt, as rising costs and falling revenue deplete their budgets.

So far, the bond defaults are not roiling the $3.7 trillion municipal market because insurance companies are stepping in to make payments to bond holders in some cases. But defaults on insured bonds are putting pressure on these insurers, which never fully recovered from the last decade’s financial crisis.

The California cities of Stockton and Hercules, as well as Pennsylvania’s capital, Harrisburg, have opted to default on some of their insured debt in recent months.

“Municipalities are saying this is what bond insurance is for - bond holders get paid,” said Richard Lehmann, publisher of Distressed Debt Securities Newsletter.

So far in 2012, there have been 21 muni defaults totaling $978 million, versus 28 defaults totaling $522 million for the same period in 2011, said Lehmann, who sees the number rising. A breakdown of defaults on insured munis was not available.

Although issuers contend they are not singling out insured munis for defaults, some believe that municipalities are strategically protecting bond buyers by relying on insurers to pay the debt service.

“Such a default may signal changing attitudes by distressed municipalities to contemplate a strategic default or bankruptcy on insured debt, knowing that bond holders will not suffer losses,” Moody’s Investors Service said in a report this week.

The credit rating agency added that municipal issuers “may be willing to damage their relationship” with insurers, which in turn could potentially be exposed to large losses.

CITY SERVICES TRUMP BOND-HOLDERS

Harrisburg’s state-appointed receiver said earlier this month that $5.3 million of payments due on general obligation bonds insured by Ambac Assurance Corp will be skipped.

“I was aware they were insured bonds when we made the decision,” David Unkovic, the receiver, told Reuters, adding that the city’s financial condition was more important than bond-holders.

“My first concern as receiver is to maintain vital and necessary service in the city,” he said. “In order to do that I need sufficient cash flows.”

The city of Stockton, nestled among the farms of California’s Central Valley, is defaulting on about $2 million in bond payments for debt sold in 2004, 2007 and 2009. Wells Fargo & Co is the trustee on each of the debt issues and has filed a lawsuit against Stockton for missing its February 28 payment on its $32.8 million of 2004 parking facilities debt, said bank spokeswoman Elise Wilkinson.

Hercules, which had considered bankruptcy, reached a settlement this month with Ambac after defaulting on a $2.4 million bond payment due in February.

Some of the companies are starting to feel the pressure. Syncora Guarantee Inc last month told a federal judge in Alabama that the prospect of it having to make good on millions of dollars a month in debt payments owed by bankrupt Jefferson County might sink the company.

In addition, the once-widespread use of insurance on new issuance has shrunk to a sliver of the muni market. After the financial crisis, so-called monoline insurers left the business, and the largest remaining insurer, Assured Guaranty, is scaling back, depending on states’ bankruptcy laws.

Insured bonds, which accounted for 57.3 percent of muni issuance in 2005, sank to only 5.5 percent of issuance in 2011, according to Thomson Reuters data cash advance today.

Insurers do not appear to perceive an immediate risk. “We don’t feel picked on,” said a senior executive at a bond insurer. “I’m not sure it’s correct to say issuers are deciding to default on insured bonds over uninsured ones. The market does not care whether a bond’s insured or not. The fact they defaulted is what the market remembers.” The executive, who spoke on condition of anonymity, said struggling issuers get no tangible benefit from skipping payments on an insured obligation over an uninsured one since any money must eventually be repaid to the insurer.

“It’s not a get-out-of-jail card,” the executive said.

THE FINANCIAL CRISIS LEGACY

There was a time when bond insurers confined themselves to the dull but steady business of underwriting municipal debt, effectively lending their superior credit ratings to cities and towns for a fee. The insurers branched out into structured financial products, which resulted in huge payouts when the credit crisis hit. One-time market leader MBIA chose to restructure, and its municipal National Public Finance business is no longer writing new policies, pending the outcome of a lawsuit filed by a number of banks challenging the restructuring. Ambac, once the second-largest U.S. bond insurer, went bankrupt in 2010, as did the parent of bond insurer FGIC. Syncora went through a major restructuring in 2009 and stopped writing new business as well. The carnage left one bond insurer standing, Assured Guaranty. On Tuesday Moody’s placed its ratings, including the A3 senior unsecured rating of Assured Guaranty US Holding and Assured Guaranty Municipal Holdings, on review for possible downgrade.

“Assured Guaranty’s business and financial profiles may have meaningfully deteriorated due to the firm’s narrower business opportunities and substantial exposure to sectors adversely affected by the financial crisis and current economic stress,” commented Moody’s Associate Managing Director Stanislas Rouyer in a statement.

The company has argued it can still effectively underwrite smaller municipalities with lower-tier ratings. Even so, it is threatening to pull out of some states without tight bankruptcy controls.

“This is weighing more heavily in our underwriting as we examine the legal framework for bankruptcy in every state that we insure municipal securities,” Assured said in a written reply to Reuters. “While some defaults have occurred on insured transactions, most have been on uninsured transactions.”

Assured Guaranty said it believes defaults will remain infrequent, saying its municipal portfolio has experienced “only modest loss development on a few isolated transactions.” As of the end of 2011, Assured Guaranty enhanced $15.2 billion of munis - a drop of 45.1 percent from 2010, when it was also the market’s sole active guarantor. Assured listed exposure to $3.9 billion of debt sold by non-investment grade issuers on its 2011 financial statements. It includes notorious names like Alabama’s Jefferson County sewer system, Harrisburg, Detroit, and Detroit Public Schools. Radian Group, which wrote bond insurance until 2008, said last September it was considering starting a new unit with dormant bond insurance assets it purchased from Macquarie Group. The Financial Times reported this week that Goldman, Sachs & Co has also been hiring for a bond insurance specialist.

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Oil prices are climbing near $108 per barrel as optimism grows about a strengthening global economy.

A private survey of the U.S. homebuilding industry on Monday found that companies are increasingly hopeful that home sales will rise in coming months. International Monetary Fund Managing Director Christine Lagarde also said over the weekend that the global economy has “stepped back from the brink.”

The rise in oil also follows last week’s rally on Wall Street.

Benchmark U.S. crude added 56 cents to $107.62 per barrel in New York while Brent crude fell by 17 cents to $125.63 per barrel in London.

Meanwhile, retail gasoline increased more than a penny over the weekend to $3.842 per gallon.

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