Treasury Department Proposes End to Checks for Federal Benefits

/PRNewswire/ -- Under new regulations proposed by the Treasury Department, Americans who receive federal benefits like monthly Social Security and Supplemental Security income will no longer be able to get these funds by check. Instead, beneficiaries will have to switch to electronic payments, either by having funds deposited directly into their accounts or onto a prepaid debit card issued by the government.

In comments filed with the Treasury Department, Consumers Union urged the agency to allow consumers to continue receiving their benefits by check and to limit the fees and improve the customer service associated with the Direct Express prepaid card for those consumers who choose this option.

"Electronic payments are not safer, easier, and more convenient than checks for all types of benefit recipients," said Michelle Jun, Staff Attorney for Consumers Union, the nonprofit publisher of Consumer Reports. "Consumers should be able to choose the option that is best for them, including paper checks. And if the government is going to encourage benefit recipients to use prepaid cards, it should do more to limit the fees charged for using them and make them easier to use."

The Treasury Department has received numerous comments from consumers who have raised concerns about the switch to electronic payments. Those comments and Consumers Union's concerns are summarized in the letter linked below:

http://www.defendyourdollars.org/FINALCmt31CFR208_8.9.10.pdf

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AICPA Supports IRS Plan to Register All Tax Preparers, Expresses Concern Over Wider Plan to Certify Non-CPAs

/PRNewswire/ -- The American Institute of Certified Public Accountants supports a proposal announced today by the IRS to regulate U.S. tax preparers by requiring nationwide registration of paid tax return preparers in 2011. The IRS's goals are to enhance compliance and elevate ethical conduct of tax preparers which are consistent with the AICPA's code of conduct and tax standards.

"The AICPA worked closely with the IRS during the public comment period leading up to this proposal and we believe this change will foster greater compliance with the tax code and better, more reliable service for U.S. taxpayers across the board," said AICPA President and CEO Barry Melancon.

"However, we have concerns about the IRS plan to provide tax preparers who are not already CPAs, enrolled agents or attorneys with a certification based on limited qualifications," Melancon said. "A new IRS examination process may cause confusion among taxpayers about the relative qualifications of tax return preparers."

The IRS plans to conduct a campaign to educate the public about the need to regulate tax preparers and the AICPA will work with the IRS to help it implement the recommendations to meet both the public interest and CPA practice requirements.

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Council Applauds House Passage of Financial Reform Bill

/PRNewswire/ -- The Council of Institutional Investors applauds the House of Representatives' efforts to strengthen the regulation of the U.S. financial system through the reforms contained in the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173).

The Council is grateful to Representative Barney Frank (D-Mass.), chairman of the House Committee on Financial Services and prime sponsor of the bill, for his leadership on this important and comprehensive legislation.

"The House of Representatives has taken a significant step toward restoring trust in U.S. financial markets," said Ann Yerger, executive director of the Council of Institutional Investors. The Council believes that the global financial crisis revealed critical gaps in the regulation of U.S. markets and the urgent need for improvements in corporate governance. "The Wall Street Reform and Consumer Protection Act gives regulators and investors new tools to oversee financial firms more diligently and promote market stability," Yerger added.

Many provisions of the act are in tune with Council priorities and the recommendations of the Investors' Working Group, which the Council has endorsed. In particular, the Council welcomes the act's affirmation of the authority of the Securities and Exchange Commission (SEC) to give shareowners the right to place their nominees for directors on company proxy cards. Making it easier for investors to nominate their own candidates for director would invigorate board elections and make directors more responsive, thoughtful and vigilant.

The Council also lauds measures in the legislation that enhance the oversight and accountability of credit rating agencies and bolster the resources of the SEC. However, the act's provisions to regulate over-the-counter derivatives trading, while an improvement, need to be strengthened.

Passage of the Wall Street Reform and Consumer Protection Act of 2009 marks progress toward an urgently needed, broad overhaul of financial markets and corporate governance regulation. The Council looks forward to Senate approval of comprehensive regulatory reform legislation next and is eager to work with Senate Banking Committee Chairman Christopher Dodd (D-Conn.) and Senator Richard Shelby (R-Ala.), ranking member of the Senate Banking Committee, on the proposed Restoring American Financial Stability Act of 2009.

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What's Ahead for U.S. Financial Institutions?

When Barack Obama is sworn in as the 44th U.S. president on January 20, he will inherit a weak economy that has helped to effectively put some Wall Street companies out of business while driving bank failures to the highest level in more than a decade.

From Knowledge@Emory

At the very least, financial institutions can expect increased government scrutiny, according to faculty from Emory University’s Goizueta Business School. The challenge, they add, will be to refrain from strangling the financial system with over-regulation.

The number of failing financial institutions is sobering, and includes the wind-down of Lehman Brothers, Merrill Lynch’s rushed sale to Bank of America, Bear Sterns’ sale to JP Morgan Chase and the failure of 22 banks as of November 21, to 22, according to a running tally kept by the Federal Deposit Insurance Corp. Numbers like that have not been seen since 1993 when 50 banks fell, according to FDIC records.

“In the past few years Wall Street made an incredible amount of money by taking on enormous leverage,” says Jeffrey A. Busse, a professor of finance at Goizueta. “But it is now clear that the risk they took on was not fully understood.”

In the wake of the current financial disaster, there’s likely to be a lot less appetite for the kind of high-leverage merger and acquisition deals that helped pave the way for an eventual credit crunch, adds Busse.

“Along with the pullback in leverage, we’re likely to see stepped-up government regulation of banks and other financial institutions,” he says. “When companies ask for federal bailouts, they’ve got to expect the funds will come with some strings attached.”

Some banks in particular initially benefitted from issuing sub-prime and other exotic loans, but suffered significant losses as the housing market collapsed, Busse notes.

“Even after this crisis subsides, banks are likely to record lower revenue as a result of tighter lending standards,” he says. “Further, this credit crunch may last for some time, and more loan restrictions will likely lead to slower growth in the economy over the long term. That might not be so bad, though. Years of easy-money policies meant that too many people got used to living beyond their means. They didn’t realize that you can’t do that forever.”

Financial markets and institutions are changing in significant ways, observes Tarun Chordia, a chaired professor of finance at Goizueta.

“With the decision by Morgan Stanley and Goldman Sachs to reorganize as bank holding companies, there are essentially no more standalone investment banks,” says Chordia. “That means their proprietary trading desks will not be as active and we’ll see a disappearance, or at least a significant curtailment, of the huge bets on markets that once characterized Wall Street.”

Chordia says banks are likely to face stiffer capital requirements, especially as the government pumps public money into financial institutions.

“Banks are likely to be required to watch their liquidity very carefully, and derivative markets will also face more scrutiny,” he says. “For instance, we are likely to see more transparency in the credit default swap market which is more likely to move towards an exchange market with appropriate constraints on counterparty risk.”

However, he notes, the financial crisis has led to a “suspension of the debate” about the appropriate level of regulation of markets and institutions.

“Risk taking by banks is likely to undergo some significant tightening,” Chordia adds.

”More regulation is coming and maybe some of it is necessary but too much regulation can also be harmful to the economy. It is important to strike the right balance so as not to endanger the innovativeness and the creativity of the U.S. economy. The optimal rate of bank loan defaults is not zero.”

As a society, says Chordia, there is a question of whether there should be tighter constraints on the ability of financial institutions to take on risk. Too much regulation can drive activity to other international markets and harm America’s standing as an international financial center, he observes.

“The economy would have suffered if over-regulation had strangled Silicon Valley,” warns Chordia. “Let us remember that Google, Apple, Cisco and countless other firms were started in the U.S. and the risk taking ability of the financial institutions was an important ingredient in their creation.”

Chordia is somewhat concerned about solving that conundrum. “We need some regulation,” he says. “The trick is to strike the right balance, and I believe that [U.S. Federal Reserve Chairman] Bernanke and [U.S. Treasury Secretary] Paul Paulson seem to understand the situation. However, I am concerned that with one party in control of the executive and legislative branches of the government we might see some excesses. Gridlock may have been better.”

“In the long run, regulators should strengthen the partition between tax-payer underwritten portions of a bank’s operations and other operations,” according to Narasimhan Jegadeesh, a chaired professor of finance at Goizueta. “One set of banking operations, for example customer deposits, have a government guarantee and are subject to strict regulations regarding investments. The other assets of banks are not as highly regulated because they have no government guarantees. The government guaranteed operations of a bank should be solvent on a standalone basis, but in the current environment troubles in the non-banking operations are hurting banks’ ability to support their deposits.”

Today’s financial crisis has been exacerbated by the repeal of the federal Glass-Steagall Act in 1999 [a 1933 regulation that prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities], he adds.

“Glass-Steagall was repealed in order to let banks compete better with other financial institutions,” explains Jegadeesh. “The problem is it let banks take more risks, but used taxpayer funds [through the FDIC, for example] to guarantee their continued existence. Government-sponsored entities such as Fannie Mae and Freddie Mac also took on risks far in excess of what could be supported by their capital base because of implicit government guarantees.”

Giving an institution explicit or implicit government guarantees is inherently dangerous because it encourages “moral hazard,” or undue risk-taking, he explains.

Fannie Mae and Freddie Mac, which were created to help increase the availability of residential mortgages, were recently seized by the government over concerns about the sharp increase in failing mortgages. Regulators did not fully understand the extent of risks they were taking until very recently.

Similarly, the Community Reinvestment Act, enacted by Congress in 1977, was intended to facilitate homeownership by the economically weaker section of the Society. CRA encouraged banks to extend credit to residents of local communities who might otherwise not qualify for home loans.

“It was a noble goal, but it effectively forced banks to extend credit to people who could not carry the debt,” says Jegadeesh. “I believe the incoming presidential administration will have no choice but to ease up programs like the CRA, although it will likely do so in a politically proper manner.”

As politicians ponder their approach, they would do well to consider the way their actions are likely to affect market liquidity, says Kevin Crowley, a lecturer of finance at Goizueta.

“They may be tempted to hammer away at hedge funds and other institutions, but over-regulation could drive money to other countries,” he notes. “Something similar happened after Congress passed the Sarbanes-Oxley Act of 2002, which imposed more rules on publicly held companies. Some foreign companies decided not to list on U.S. markets, and there was an increase in the number of public companies who voluntarily delisted as a way to escape the additional reporting costs associated with Sarbanes-Oxley compliance.”

But with a Democratic Congressional majority and a Democrat in the White House, Crowley sees little chance of a retreat in financial regulation.

“Many kinds of players contributed to this financial meltdown,” says Crowley. “But politicians generally find it easier to blame banks, hedge funds and speculators than to admit their own role. The concern now is that the regulatory pendulum may swing too far and possibly choke off a recovery.”


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