Bob’s Journal For 9/21

FDIC Identifies Continuing Risks in the Banking System

The banking system isn’t making headlines, but it still “continues to face significant downside risks,” according to the chairman of the FDIC, the primary insurer of bank deposits, Martin Gruenberg.

There was a banking crisis last spring, when a series of mid-size banks, led by Silicon Valley Bank, failed after depositors withdrew a large amount of money electronically. It probably was the first time in the United States that bank runs occurred online instead of in person.

Summarizing the FDIC’s report on banking activity for the second quarter of 2023, Gruenberg pointed out that deposits declined for the fifth consecutive quarter. Most of the $98.6 billion in deposits that left banks were uninsured, because they exceeded the FDIC insurance limit of $250,000.

The good news is this deposit outflow was much lower than the $472 billion of deposits lost in the first quarter.

To prevent the loss of more business, banks also raised the yields they paid on deposits, and that’s decreased profitability.

Banks continue to face pressure to pay higher yields on deposits as the Federal Reserve keeps interest rates high and yields on money market funds and other bank alternatives equal or exceed 5%.

Weak commercial real estate markets around the country are an additional pressure point. Banks are major lenders to commercial real estate owners, and those loans are a significant part of bank portfolios.

Many banks also purchased treasury bonds when interest rates were low. They now have paper losses on those bonds. Under banking regulations, they don’t have to recognize those losses as long as they own the bonds. But the losses still hamper their ability to make loans and earn more income.

In the second quarter, the FDIC didn’t add to the list of problem banks. There were 43 banks on the list, and in aggregate they had $43 billion in assets.

As I’ve pointed out before, problems in the banking system lead to problems in the economy. Banks provide much of the lending to small- and mid-sized businesses and to much of the commercial real estate sector. A weak banking system generally results in weak growth.

Here’s Another Celebrity Estate Dispute to Learn From

U.S. Sen. Dianne Feinstein of California still is alive, but there are several legal actions underway in her name involving her assets.

Feinstein’s wealthy husband, Richard Blum, passed away in February 2022. Since then, the 90-year-old senator has suffered health setbacks. Questions have been raised publicly about her cognitive abilities.

Feinstein’s daughter (who has a power of attorney for Feinstein) filed a couple of lawsuits.

One suit alleges the trustees of one of the trusts created by Blum aren’t making distributions for Feinstein’s medical care as required by the trust agreement. The suit also alleges that the individuals currently acting as trustees weren’t properly appointed and that Feinstein’s daughter should be trustee.

After Feinstein passes away, the trust assets will go to Blum’s children from another marriage. That’s led to accusations that Feinstein’s daughter is trying to transfer the assets to her mother’s estate.

The other suit, also filed by Feinstein’s daughter, alleges that the trustee of several other trusts is improperly preventing Feinstein from selling a beach house so that Blum’s daughters can use it at no cost.

The suits show that while privacy is one reason people use trusts, privacy isn’t guaranteed. A party with an interest in the trust can file a lawsuit and make the trust and its terms public.

The suits also show that after someone passes away, disputes between the next generations can surface and become ugly, especially when blended families are involved.

The interests of the surviving spouse can conflict with those of the children of the first spouse to pass away. The children of the surviving spouse also can have interests that conflict with those of the children of the deceased spouse.

It’s important to anticipate potential conflicts when developing an estate plan. Of course, it’s vital to have the appropriate documents and be sure the language in the documents is clear and unambiguous. It’s also important to be aware that circumstances could change, and there needs to be some flexibility in the plan.

Often in the case of special assets such as the Feinstein beach house, a good strategy is to state that it will be sold after one spouse passes away and the proceeds will be distributed. That eliminates disagreements between heirs with different personalities, interests and goals.

Another good strategy is to eliminate the distinction between income and principal in trusts. Instead, mandate what’s called a unitrust, under which a percentage of the trust is distributed each year or cash is distributed to pay for certain needs of the surviving spouse regardless of whether it comes from income or principal. That way, there’s no dispute over whether there is enough income to distribute or whether the trust’s investments have the proper balance between income and growth.

The best remedy is to have full, candid discussions with beneficiaries about what is in the estate plan. Most disputes over estates arise because someone’s expectations weren’t met by the estate plan or they were surprised by the plan’s details. Disputes are less likely when everyone knows the plan in advance and has a chance to voice objections while the estate owner is alive.

What You Need to Know About Open Enrollment, Medicare Advantage Plans, and the New Prior Authorization Rules

The first big issue for a Medicare beneficiary is whether to enroll in original Medicare or a Medicare Advantage plan. The decision can be reviewed each year during the open enrollment period, which runs from Oct. 15 through Dec. 7.

A major difference between original Medicare and Advantage plans is that most Advantage plans require prior authorization before a type of medical care is covered by the plan. The plan has to approve not only the care or service but also the doctor or other medical provider.

There have been negative reports about prior authorization in Advantage plans in recent years. For example, an Inspector General report in 2022 found that 13% of denials were for benefits that should have been covered.

The report said that some Advantage plans used clinical guidelines not contained in Medicare or requested additional documentation that wasn’t necessary.

Some beneficiaries complain that it takes too long for plans to rule on prior authorization requests and that the appeal process isn’t clear and takes too long.

A consequence is that disenrollments in Advantage plans increased to 17% in 2021 from 10% in 2017. But Advantage plans continue to be popular, enrolling more than 50% of Medicare beneficiaries in 2023 for the first time.

In response to the complaints, earlier this year, the federal government issued new prior authorization rules for Advantage plans that are set to take effect in 2024.

The rules require Advantage plans to issue more information about prior authorization requests to beneficiaries, establish clearer guidance on how to submit a request that’s likely to be successful and release more data to the public.

Authorization isn’t supposed to be denied for financial reasons. An Advantage plan member is supposed to receive the same types and levels of care they would receive under original Medicare.

Advantage plans still can limit coverage to doctors and other medical providers in their networks.

The Data

Retail sales increased 0.6% in August following a 0.5% increase in July.

A 10% rise in gasoline prices accounted for much of the August increase. Excluding vehicles and gas, retail sales increased 0.2% in August after increasing 0.5% in July.

In mid-September, the Consumer Sentiment Index from the University of Michigan was 67.7. That’s down from 69.5 at the end of August. The two-year high of 71.6 was reached in July.

Consumers’ expectations for the next year actually improved from the end of August, but there was a sharp decline in assessments of current conditions.

In September, optimism among home builders declined for the second consecutive month to the lowest level in five months, as measured by the Housing Market Index from NAHB.

The index declined to 51, from 57 in August. The sub-index of expectations for the next six months declined to 49 in September from 55 in August.

Housing starts declined 11.3% in August after rising 2.0% in July. The percentage decline in August was the largest since July 2022, and the number of starts in August was the lowest since June 2020.

Most of the decline was in starts of multi-family units, which fell 26.3%. Single-family home starts were 4.3% lower in August than in July.

The Producer Price Index (PPI) increased 0.7% in August after rising 0.4% in July. The PPI was 1.6% higher after 12 months through August, which compares with a 0.8% increase through July.

Excluding food and energy, the core PPI rose 0.2% in August, which follows a 0.4% increase in July. Over 12 months, the core PPI was up 2.2% through August, the same as through July.

The Empire State Manufacturing Index was 1.9 in September, an improvement from negative 19 in August.

Industrial production recorded a 0.4% increase in August and a 0.2% rise over 12 months. The comparable numbers through July were 0.7% and 0.0%, respectively.

Manufacturing production increased only 0.1% in August and was down 0.6% over 12 months. In July, the respective numbers were 0.4% and negative 0.6%.

New unemployment claims increased by 3,000 to 220,000 in the latest week.

Continuing claims, which lag a week behind new claims, increased to 1.688 million from 1.684 million.

The Markets

The S&P 500 lost 0.38% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 0.35%. The Russell 2000 tumbled 1.36%. The All-Country World Index (excluding U.S. stocks) added 0.27%. Emerging market equities retreated 0.56%.

Long-term treasuries tumbled 1.52% for the week. Investment-grade bonds fell 0.26%. Treasury Inflation-Protected Securities (TIPS) lost 0.35%. High-yield bonds declined 0.23%.

The dollar rose 0.51%.

Energy-based commodities increased 1.42%. Broader-based commodities rose 0.88%. Gold gained 0.97%.

Bob’s News & Updates

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