DIVORCE

SPECIAL EDITION: A PRIMER ON THE SUB-PRIME MESS

Like Marvin Gaye, we are now all asking “What’s going on?” This edition will diverge from taxes. Instead, I will summarize:

1. How did we get into this economic hole?

2. Why do we keep digging?

3. Can the hole get so deep that we cannot climb out?

4. What will the federal bail out fix and what may not be fixed by it alone?

5. What have we leaned?

6. Why is the future not bleak for America?

1. How did we get into this economic hole?

Some factors contributing were:

a. All of the players were paid up front - the banker, the mortgage broker and the investment banker all were paid on the front end and therefore had no stake in the performance of the mortgages or securities backed by packages of mortgages.

b. No federal regulatory scheme was present and state regulators fell asleep on the job. The real estate housing market, fueled by home buyer naivety mortgage broker fraud, banker indifference and investment banker greed, spiraled into a frenzy of speculation. The resulting h...

THE SUB-PRIME MESS CONTINUED

BAIL OUT DEVELOPMENTS

1. The Treasury will use $250 billion of the $700 billion congressionally authorized bail out fund to buy preferred stock of commercial banking institutions. Initially, it will take stakes in 8 of the largest banks and Merrill Lynch. Some of these banks do not need financial help from the Treasury but all were pressured to join the plan lest the public perceive banks participating as weak precipitating deposit withdrawals. The other $125 billion will be invested in perhaps hundreds to thousands of healthy banks thru November. The remaining $450 billion of the bail out fund will be used to purchase bad assets from financial institutions as originally conceived. The Treasury retreated from using all of the funds to purchase bad assets because:

a. The Treasury wanted to join a globally more unified front in attacking what clearly had become a world-wide economic crisis. If countries take ad hoc action offering more security, such measures cause unanticipated f...

TAX HELP IN THE BAIL OUT BILL AND A FEW OTHER YEAR END TAX CONSIDERATIONS

The Emergency Economic Stabilization act of 2008 was signed by President Bush on October 3, 2008. The main focus on the bail-out bill was to stave off further economic panic. These provisions were discussed in earlier editions, “Primer on the Sub-Prime Mess” (Volume 2, No. 3) and “Sub-Prime Mess Continued (Volume 2, No. 4). This edition will discuss only a handful of the more than 300 tax law changes included in the bail out bill and some sundry year-end tax concerns.

MORTGAGE FOREGIVENESS DEBT RELIEF EXTENDED

The Mortgage Forgiveness Debt Relief Act of 2007 (Act) provides tax relief to defaulting homeowners who might otherwise owe income tax on the forgiven portion of their mortgage obligation that was to have expired in 2008 The Act, extended through 2012, makes nontaxable debt forgiven on a qualified principal residence (QPR) with certain limitations as follows:

1. The relief applies to debt forgiven between January 1, 2007 and December 31, 2009.

2. Qualified principal reside...

THE SUB-PRIME MESS GETS MESSIER

I continue to focus on the financial crisis in lieu of my usual tax commentary because of our mutual concern for this problem.

BAIL OUT CHUTES AND LADDERS

1. The Bail Out now resembles the exciting up and down game for children in which players spin the spinner and move pawns square by square. If a pawn lands on a picture square at the bottom of a ladder, the player climbs up with a good deed while naughty deeds slide players back down for landing on a picture square at the top of a chute. Of course, what square one lands on depends on the chance of the spin. So it is with the bail out, the Fed and Treasury are employing tools for managing the money supply and spending but they can’t always foresee all of the consequences of every move. Thus, the bail out plan continues to be adjusted on the fly. The latest adjustments are:

a. The Treasury is for now abandoning the plan to use the remainder of the $700 million fund to buy bad loans held by financial institutions. Instead, i...

THE SUB-PRIME SOAP OPERA

Following the appearances and sometimes conflicting statements of President Bush, Congressional leaders, the Fed Chairman, Treasury Secretary, FDIC and SEC heads, the beggar pleas of the auto big three, and parade of President-Elect Obama’s appointees, I begin to feel I am watching “As the World Turns.” I might be amused were the stakes less serious. Drama aside, I will continue to focus on the financial crisis in lieu of my usual tax commentary because of the many developments the past two weeks since my last commentary.

BAIL-OUT-OLOGY

1. We are in a recession: Economists have finally figured out what every common person has known, that times are bad. Economically speaking, the U.S. economy has been in a recession since December 2007 they now report. Some other dour third quarter or later months economic indicators reported are:

a. Employment: In November alone 500,000 people were laid off from jobs. This was the steepest one month drop since 1974. In total, this year 1...