Download MarketAlert Emergency Economic Stabilization Act

MarketAlert
November 2008
Emergency Economic Stabilization Act:
Washington’s Lifeline for Banks,
Investors, and the Economy
while providing relief for
On October 3, Congress passed, and President
Bush signed into law, the Emergency Economic
Stabilization Act of 2008. The Act bolsters ailing
banks and financial institutions by authorizing the
Treasury to buy their distressed assets. It also provides taxpayer and investor relief in the form of
tax breaks and higher levels of FDIC insurance on
bank deposit accounts. Among other provisions,
the Act:
individuals to help them
■ Establishes a mechanism whereby banks and
The new Act lays the
groundwork to support
ailing financial institutions
in this time of crisis,
grapple with the slowing
economy.
other financial firms may sell up to $700 billion
in distressed assets to the U.S. Treasury. This
unprecedented step will help reestablish confidence in credit markets, prompting lenders
to step up loan activity to consumers and
businesses, and potentially jump-starting the
U.S. economy.
■ Increases the threshold for FDIC insurance of
deposit accounts from $100,000 to $250,000
through December 31, 2009.
■ Requires securities brokers to report the cost
basis of stock transactions to the Internal
Revenue Service, providing an extra check when
investors report capital gains or losses.
■ Increases the income threshold for exemption
from the alternative minimum tax (AMT) to
$46,200 for individuals and $69,950 for joint filers for the 2008 tax year. These thresholds had
been scheduled to revert to $33,750 and $45,000
for single and joint filers, respectively. In addition, the Act expands the ability to use tax
credits to offset the AMT.
■ Extends existing tax provisions that were set to
change or expire through the end of 2009,
including: itemized deductions for state and
local sales tax; the deduction for qualified higher
education expenses; tax credits for energy-efficient improvements to homes; the ability of
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people over age 70 ⁄2 to contribute an IRA distribution of up to $100,000 to charity and exclude
the amount from income.
■ Allows homeowners whose mortgage debt was
reduced through foreclosure or restructuring, to
not report the debt reduction as income. This
rule originally was scheduled to expire at the end of
2009 but is now effective through 2012.
To be sure, certain aspects of the Act remain
unclear — most specifically how distressed assets are to
be valued — and uncertainties lie ahead with its
implementation. Still, it sends a strong signal to
businesses, individuals, and financial institutions that
the federal government is
committed to supporting and reinvigorating
the financial system and the economy.
Portfolio Strategies
Although the new legislation is targeted
primarily at financial institutions, it does
carry significant implications for markets
and investors. Consider the following:
Don’t give in to panic selling or other
emotional decisions. As of October 7, 2008, stocks
had declined more than 35% from the peak of the
last bull market on October 9, 2007. Selling now
could cause you to lock in losses and miss out on
a subsequent upturn. Since 1950, in the first 12
months following the low point of a bear market,
the S&P 500 gained an average of 28.7%. If an
investor missed the first six months of the recov1
ery, the gain was reduced to 10.3%. Of course,
past performance does not guarantee future
results.
Capitalize on deposit insurance. The new
$250,000 limit for FDIC insurance applies to
checking and savings accounts, money market
deposit accounts, and certificates of deposit at
FDIC-member banks. The FDIC provides separate
insurance coverage for deposits held in different
ownership categories, such as IRAs and trust
accounts.
The FDIC does not insure other products, such as
stocks, bonds, and mutual funds, marketed by
insured banks. If recent market volatility has you
unnerved, you may want to allocate a portion of your portfolio to
FDIC-insured accounts. Be aware, however, that their long-term
returns have
not exceeded inflation by as great a margin as
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stocks.
Diversify your holdings. Consider how an investor
who owned a mix of stocks and bonds during the
last bear market would have fared compared with an
investor who owned only stocks. Between
March 31, 2000, and September 30, 2002, an
investor with a $10,000 portfolio consisting solely of
stocks that mirrored the S&P 500 would have
experienced a 39% loss. In contrast, an investor
whose portfolio included 50% stocks and 50%
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bonds would have lost 9%. Past performance does
not guarantee future results.
Astute market observers know that conditions
can change quickly. Avoiding panic selling,
capitalizing on FDIC insurance, and owning a
mix of stocks and bonds could put you in a position to benefit from the next market upturn.
1 Source: Standard & Poor’s. Stocks are represented
by the S&P 500.
Source: Standard & Poor’s. Savings accounts are
represented by the yields on six-month certificates of
deposit as reported by the Federal Reserve, inflation by
the Consumer Price Index. Returns are for the 30-year
period ending December 31, 2007.
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Source: Standard & Poor’s. Bonds are represented by the Lehman
Brothers Aggregate Bond Index.
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