The Seven Sins of Wall Street

IvrySevenSinscoverWith the financial crisis now in the rear-view mirror five years ago, it should be clear sailing for the giant U.S. banks that arguably created the problem, right?

Not according to veteran Bloomberg News editor and investigative reporter Bob Ivry. In his recently published book, The Seven Sins of Wall Street, Ivry pulls no punches about the continued sins of the major players like Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo.

Their collective sins? Gluttony, Wrath, Envy, Pride, Sloth and — he saves the best and most obvious for last — Greed. And as the book’s subtitle suggests (Big Banks, Their Washington Lackeys, and the Next Financial Crisis), the fact that so few of these sins were punished the first time around could mean a repeat of the crisis.

Just when you thought it was safe to go back into the water!

Too big to jail?

Sadly, it seems that the slogan “Too big to fail” could as easily be modified to “Too big to jail.”  We should be “very afraid” of the shenanigans of these financial behemoths  “since the crisis” Ivry writes.

Ivry brings to life the contrast between the lavish lives of the masters of the universe running these institutions, and the thousands of Americans who lost their homes to predatory lending practices and shady mortgages. And he doesn’t shrink from making his own recommendations: the financial giants need to be shrunken down to a size where they can no longer be deemed “too big to fail.” He gives voice to the outrage of Main Street and the essential proposition propagated by these banks that it’s “heads we win, tails you lose.” By which he means, the system is still such that these institutions can take enormous bets with other people’s money (i.e. depositors) and if they win, they go home with giant salaries and even more gigantic bonuses. And if they lose, well again, their mistakes are paid with other people’s money (i.e. taxpayers) and more often than not the executives not only keep their jobs but still end up with enormous bonuses.

Ivry calls for a return to the days when deposits were kept separate from investment banking. Or as he colourfully phrases it, “The easiest way to make the biggest banks smaller is to separate their dice games from Granny’s deposits.” He’d also like to see them exit from commercial activities: “They ought to be financing oil exploration and coal mining, not doing it.”  (my emphasis added).

If you can’t beat them …

Let me add a few points that Ivry does not cover. Since this is a blog about financial independence, it may be worth observing that if you feel there’s little you can do as a small investor about the dominance of North America’s giant banks, you could at least profit from them. If the advantages depicted by Ivry are are as overwhelming as he makes out in his book, then it might make sense to buy an ETF focused on this sector.

For U.S. financials you might try the Vanguard Financials ETF (VFH/NYSEArca), which includes not just big US banks but also wealth managers and financial services issues of all stripes. Canadians wishing to focus on U.S. banks but hedging back into Canadian currency could consider the BMO Equal Weight US Banks Hedged to CAD Index ETF (ZUB/TSX). And of course, seeing as Canada’s big banks sailed through the financial crisis practically unscathed, you could also try the iShares S&P/TSX Capped Financials ETF (XFN/TSX).

Can IPPs give you more room than RRSPs?

My latest MoneySense blog compares the tax-sheltered contribution room available for RRSPs and Individual Pension Plans or IPPs.

For archival purposes and continuity, I reproduce the text below.

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Stephen Cheng, Westcoast Actuaries Inc.

A few weeks ago, we looked at the topic of raising RRSP limits. As noted then, it was based on a C.D. Howe Institute report that suggested one possible solution to the alleged retirement crisis was simply to go back to the half-century-plus RRSP and raise contribution limits for the (relatively) few affluent people who are forced to save in taxable accounts because they’ve maxed out on RRSP room.

If you’re at top executive or own your own business and are 40 years of age or older, there may be another way to get the benefits of RRSPs. The Individual Pension Plan or IPP is an employer-provided program that replaces RRSP savings by an employee, says Stephen Cheng, managing director of Vancouver-based Westcoast Actuaries Inc. To be eligible for an IPP, you need to receive pension-eligible T-4 employment income. Self-employment income, partnership income and dividend income are not pension-eligible, Cheng says. So if you own your own business, you’d have to pay yourself a regular salary that generates T-4 employment income.

IPP assets are creditor-proof

One advantage is that all eligible employer contributions are tax-deductible for corporation tax purposes, but won’t be taxable to the employee until the plan starts to generate pension income. Also, if the IPP is in deficit after the three-year actuarial valuation, the employer can top it up with further contributions. In addition, IPP assets are creditor-proof: always a plus for the self-employed; and as with traditional Registered Pension Plans, pension income can be split up to 50% with one’s spouse, for income tax purposes (pension splitting).

Advantage rises with age

The older you are, the more the relative room can be held in an IPP relative to an RRSP. For those in the top tax bracket, the maximum RRSP contribution is currently $24,270, an amount that does not vary by age. However, IPP room gets larger the closer you are to retirement. Maximum IPP contribution room at age 40 is $26,097, rising to $31,488 by age 50, $38,005 at 60 and a whopping $41,282 at age 65. In the latter case, the IPP has a contribution room advantage over the RRSP of a massive $17,012 a year!

Employers can make past service contributions to a new IPP in 2014, Cheng says, providing the employee received pension-eligible T-4 type employment income over the years being calculated. The employee must transfer an amount from his or her personal RRSP into the IPP (since 1997 the maximum transfer amount required for each service year has been $24,330, with lesser amounts between 1991 and 1996). For all years between 1991 and 2013, the combined maximum that can be transferred into an IPP from an RRSP comes to $510,470: just over half a million dollars! If the IPP is set up in 2014, the RRSP deduction limit will be reduced to $600 each year, starting in 2015.

The calculations are not simple but you can find a free customized IPP quote online here.

Why I bought into the Alibaba IPO, despite the “Sheeple” ticker.

Sheep lying in front of another standing against white background

What was that ticker symbol again? BAAAAAABBAA!!

Yes, I know that BABA is an unfortunate ticker symbol if you think this is the latest way Wall Street has figured out to fleece the sheeple: BAAAAHHH!

I went ahead and picked up a few dozen shares today in the low 90s: no bargain perhaps but my reasons for doing so were in Friday’s Financial Post, which you can find here.

As the day progresses, it seems we’ve seen the top for now. You can find a short clip on the topic of its pricing from Mad Money’s Jim Cramer here.

Time for the “equanimity” part of the equation that I mentioned at the end of the piece.

Catch the Wave: Cloud-based accounting

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Cloud-based accounting means the end of shoebox accounting

The book The E-Myth Revisited makes some amusing points about small business owners. Almost to a man (or woman), they loathe accounting. They may enjoy marketing or creating new products or services, but keeping track of expenses, invoicing and the like? It’s the last thing they really want to do, which leads to the usual habit of procrastinating by shoving paper receipts into the proverbial shoe box, then presenting the whole shooting match to their accountant once a year.

But no accountant I know will accept such an arrangement, or if they do they’d have to charge a prohibitively high rate for the service. In practice — and I base this on running a personal corporation since 1999 — you at least have to put all the receipts and paperwork into folders representing the major expense categories, then summarize it all on a spreadsheet so the accountant can make some sense of it.

At one point, I experimented with shrink-wrapped accounting software, which typically cost a few hundred dollars. But I was never comfortable with it so stuck to the shoebox-and-spreadsheet routine. Until this summer, when courtesy of the very helpful folks at Knightsbridge, I discovered Accounting by Wave.

This software has several good things going for it. First, it’s free. Second, it’s cloud-based, so you can store all your info on “the cloud” and access it from whatever computer you have access to: there’s even an iPhone app. Third, it’s Canadian. And fourth, it’s relatively intuitive and easy to use. What more do you want?

Not surprisingly, the software has 1.5 million happy users, most of them the small businesses, consultants and freelancers the company has targeted. And wouldn’t you know it, right off the topic they promise “shoebox accounting stops now.”

Integrated with your business bank account

The software lets you input your corporate bank account information so right off the bat payments to your account and disbursements from it are automatically recorded. You’ll have to spend some time reconciliation expenses incurred via credit cards, cash disbursements and the like but an hour spent every week or two should suffice for most home-office setups like mine. And it sure beats dreading the annual spreadsheet ritual!

The software is quite proficient at keeping track of customers and invoicing, and it generates various reports on demand that show the current expenses, payments and accounts receivable. And yes, it lets you add HST. Again, there’s an element of garbage in, garbage out here, so the reports will only be meaningful if you’re staying on top of all the transactions and properly categorizing them.

How does this relate to Findependence Day?

Glad you asked! If you’ve followed this blog since May, you’ll know I believe in creating multiple streams of income, whether you’re gainfully employed, semi-retired or even fully retired. Part of that is Internet-based: refer to Robert Allen’s book, Multiple Streams of Internet Income, or any of the three books by Scott Fox. (His site is here, and latest book here).

But the other piece of the equation is running your own business and keeping track of all the moving pieces. As I’ve come to appreciate, a traditional “job” really comes down to serving and satisfying a single client, which in practice means “your boss.” The traditional corporate or government job largely shields the employee from accounting: all you need to worry about is submitting the annual T-4 slip with your annual tax return, claim the usual deductions and hope for a tax refund at the end of it.

The good thing about self-employment is that (hopefully) you don’t have any boss but yourself and instead of one huge mega-client, you have many smaller clients. You may lose one from time to time but the others can keep the ship afloat until another replaces it.  Seen that way, a “job” is the opposite of diversification: you have all your eggs in one basket and if your boss decides to smash that basket, you’ve got trouble.

This cloud-based software is a real boon to keeping on top of your business. Hopefully, all your earned income from multiple clients or products or services constitute a major part of your revenue stream. Of course, you should also have investment income, emergency savings and pension income (depending on your age), so that your “Findependence” isn’t riding on any one of these.

 

 

 

 

 

 

 

 

Boosting RRSP limits: two views

Up, up and away for RRSP limits? Photo J. Chevreau

As I noted Thursday in this blog and elsewhere, I’ve always believed Canadians should have higher RRSP contribution limits and/or the equivalent space in registered pension plans.

It seems the C.D. Howe Institute agrees, based on this paper released Thursday, and which has already created a fair bit of publicity. I’ve received some email on this site (via jonathan@findependenceday.com) to the effect that “only the rich” benefit from more RRSP room and that, in any case, low-income earners are better off with TFSAs.

I’ll quote from some of the skeptics below, but first let me reiterate the point that Ottawa will eventually get any tax revenue it may lose by raising RRSP limits now. As any retiree with a substantial RRIF knows, forced annual RRIF withdrawals will be fully taxable and may even result in the clawback of OAS or other benefits. That’s why some question my statement that higher-income earners should welcome more RRSP room.

Two pluses, one minus

I know those with big RRSPs will eventually pay the piper but remember two things. One, several years or decades of deferred and compounded growth on investments is worth a lot. Second, most of us can expect to be in a lower tax bracket in retirement than when we were working. If you can defer tax while you’re in a 46% tax bracket and pay it many years later when you have no other income and are in a 23% tax bracket, that to me is a fair trade.

A 72-year old reader with the first name James makes the following counterpoints:

… when the other shoe drops and you are withdrawing money, here are the nasty realities:
1. You may be paying higher tax rates than when you put it in! This is true in my case and you do not have to have amassed a huge fortune for that to occur.
2. The whole nasty business of clawback, which has huge potential marginal tax rates.
3. The fact that the government controls the rate at which you reacquire your own money – regardless of your needs and limitations.

Any reform of RRSPs therefore should not only deal with maximum deposit limits but should remove any restriction on the amount and the timing of withdrawals. If I want to leave it in there until I die I should be able to and it can then by taxed in my estate (as a lump sum, which the government would love!) or passed on to one more generation – the spouse.

In the absence of hard numbers on this situation, I tried very hard to come up with my own scenarios using a sophisticated hand-held financial computer, and concluded it was better to collapse my entire RRSP before my 72nd birthday, but I may be on shaky ground without stronger financial planning tools than I had access to.

What if we didn’t tax CPP and OAS benefits?

Another reader, James from British Columbia, makes a suggestion that has occurred to me in the past. Instead of introducing an expanded CPP that will antagonize employers by in effect hiking their payroll costs, why not just make CPP and OAS income go further in old age by not taxing the income?

There could be a means test to apply some tax rate for high income earners, as there is now on OAS, but people who earn under $75,000 per year, for example, would pay no taxes on CPP and OAS benefits.

That simple, stroke-of-the-pen policy change by Ottawa would boost retirees incomes by at least 15% on those sources and not cost a single job. Nor would it require any provincial consensus.

 It would cost Ottawa tax revenue, so of  course it’s a nonstarter, but it’s not difficult to eliminate the job-killer argument if the federal government really has the will to help low-income retirees.

 

 

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