Buffett’s

huge derivatives bet proves costly

Shares of Warren Buffet’s insurance holding company are on the ropes this month, plunging 30% in part because the fabled investor dabbled in an area of the market he has long publicly derided: derivatives. And due to a tangled web of financial relationships, they may be taking Goldman Sachs shares down with them.

Investors are concerned about a $37-billion bet that Buffett made last year that U.S. and world equity values would be higher in 15 to 20 years than they were then, when the Dow Jones Industrials were trading around 13,000. Through his firm, Berkshire Hathaway, Buffett sold option contracts, known as “naked puts” to an undisclosed group of investors for around $4.85 billion, reportedly using Goldman as broker.

The buyers saw the puts as a type of insurance that would pay off royally if stocks fell over the next decade. They were seen by Buffett as an easy way to pocket a quick $4 billion-plus, which was booked much like an insurance premium, even though he is famous for scoffing at derivatives as “weapons of mass financial destruction.”

But easy money is the worst kind. The problem is that stocks worldwide have gone downhill in a hurry, and with a lot of the sort of volatility that makes put contracts swell in value. And due to accounting rules, this has made Buffett already need to mark down a $6.7 billion loss on the trade even though the trade has another 14 years to work out.

Because of its solid-gold credit rating, Berkshire Hathaway was not required to put up collateral to make this trade. But now rumors are flying on Wall Street that the owners of the contracts have demanded that broker Goldman Sachs put up collateral for the rest of the amount due. Since the value of the trade could be infinite, the collateral demands are said to be large, and fears that Goldman will struggle to make good on its obligation has panicked shareholders.

Indeed one theory making the rounds this week is that Buffett put $5 billion into Goldman at around $125 per share in September not as an investment but to help provide funds for the collateral. 

Of course, there are other reasons for investors to sell Berkshire shares, which are down 42% overall this year, back to 2003 levels. Many of its biggest stock holdings have plunged in value this year, including American Express, General Electric, SunTrust and Goldman itself. And like most insurance companies, it holds a lot of bonds that have plunged in value during the credit debacle.

To see how Buffett described the put contracts in his 2008 letter to investors, click here. There’s little doubt that he and Berkshire will survive this mess. But for now this a blemish on his otherwise sterling record of achievement.

To see my comments and links on stocks and the economy throughout the day, follow jdmarkman on the free social networking site Twitter.

Retirement dreams

give way to despair, anger

Many grappling with golden year disappointments as nest eggs dwindle

Kim Carney / msnbc.com A rising number of people have seen their retirement plans evaporate. As 401(k)s dwindle, their dreams of golden years are being replaced by feelings of hopelessness and  anger. View related photos

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It was so close. And then, it wasn’t.

Fifty-year-old Eddie Whitlock thought he was closing in on his hard-earned golden years. According to his master plan, in just five short years he’d retire from his job as executive director for Mental Health America of Northeast Georgia. Then he’d turn his attention to the important things: golf, travel and finally writing that novel.

But this fall, after months of watching his 401(k) dwindle and his stock earnings sink, he accepted his new retirement reality: His golden years would be delayed another 10. If they ever came at all.

“I really think I’ll be working until I die,” says Whitlock, who lives in Athens, Ga. “I’ll be at work till the day they carry me out on a stretcher with a coroner’s tag tied to my big toe.”

One of the biggest worries for those on the brink of retirement used to be how to fill all that spare time. But as the economic meltdown devastates the savings of millions of Americans, a rising number of older workers are now are realizing that retirement instead will have to come much later than they’d planned — if at all. And some of those who had only just to begun to enjoy their leisure years are now having to tuck aside their dreams and, in some cases, their pride, to return to the workforce.

For many, feelings of hopelessness, despair, anger and shame have darkened what until very recently they’d banked on being a new beginning.

“It’s a real sense of shock,” says Phyllis Moen, a University of Minnesota sociologist who studies adjustment to retirement. “Here they thought they were in control, and they created a life that works — and suddenly, they’ve lost control. I think what’s happening is a real upending of expectations of the 50s, 60s and 70s — of what life’s going to be for this group of people.”

Psychologists say those going through this kind of financial crisis may feel a spike in anxiety, panic attacks and depression. And for some, suicide may seem like the only way out. One msnbc.com reader from Cleveland, Ohio wrote ” I have contemplated suicide, but my family does not have enough money to bury me.”

During the Great Depression, suicide rates rose from 14 to 17.4 per 100,000 people in 1933, according to the American Association of Suicidology, a nonprofit organization that promotes research and training in suicide prevention.

Psychologists are cautious about saying whether they expect a similar increase during these financial hard times, but seniors are in an age group already at higher risk for suicide: Although adults 65 and older make up just 12 percent of the population, they accounted for 16 percent of suicide deaths in 2004, according to the Centers for Disease Control and Prevention.

“There’s going to be a profound sense of loss for some people who had expected to enter their last stage of life and just enjoy it — and now they’re having to go back to work,” says Jennifer Harkstein, a New York City clinical psychologist. “For people who have expected to be retired by 70 or 75, there’s going to be some loss, some grief, that they can’t go and live these years that they’ve planned for.”

For Whitlock, the biggest blow came from the increasingly volatile stock market, as he watched his nonprofit employer’s account lose 25 percent of its value over the last year and a half. When he says he’s too afraid now to even peek at his 401(k), he’s only half joking.

“In the old days, people would be guaranteed an income for life, and they’d have an age at which it was clear they should retire,” says Alicia Munnell, an economist and director of the Center for Retirement Research at Boston College. “We’re now shifting to an age of 401(k) plans, which is shifting all the risks and responsibility to the individuals.”

Downsizing dreams
For those who have retired, it’s a matter of downsizing dreams. So far, 63-year-old Edith Durrant’s retirement years haven’t turned out the way she pictured.

“My real dream always was to own a motor home and just travel,” says Durrant, a retired postal service worker who lives in Bellingham, Wash. Because she and her husband, Ben, had saved a modest nest egg, she says, “I didn’t think I would ever have to worry so much about money again.”

But five years ago, Edith Durrant, who is both epileptic and diabetic, had a particularly intense seizure that sent her into a coma for seven days. The cost of her hospital stay, her medications and the year and a half of care it took her to get well again drained everything the couple had saved for their retirement. Still, with her pension and Social Security benefits, they were doing OK — until Ben Durrant was laid off from his job as a sales manager at Office Max in June. Five months later, he’s still looking for work.

Msnbc.com senior producer John Schoen answers your questions about retirement.

“Don’t get me wrong. We eat. We have a roof over our heads. By the look of my belly, it’s not bad,” says Ben Durrant, who’s 59. “But still, there’s the other side of it. You look on the Internet and it talks about these high fashion things and the trips and things like that. You look at them and you wonder — where did mine go? I’m not going to be able to do that. It’s a very sobering thought.”

Adjusting expectations
The Durrants have resigned themselves to their retirement reality, which is what experts recommend: During an economic downturn of this magnitude, it’s time to let go of most golden-year fantasies.

“I mean, I’m of that age. We’ve all had a disappointment,” says economist Munnell, who turns 66 next month. That’s the age she typically recommends that people retire, and she always imagined she’d follow her own advice. Now, she’s buckling down for at least another five years on the job.

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“I’m very like everybody else — I felt like we had put aside enough money, but I didn’t plan on a buffer of 20 percent,” she says. Speaking for herself, she says, “The feeling is one of failure, even though it was really very hard to anticipate anything like this. You do feel like you failed.”

For those at or near retirement age, there’s no more time to save. There’s no magic investment to uncover. It’s best to face your 401(k) and lower your expectations — fast, Munnell says.

“You’ve got to play the cards you’re dealt, and play them the best you can,” she says. “Mourn if it’s a serious loss for you, but then, candidly — get over it.”

And then get to work. With the unemployment rate at its highest in more than a decade, those lucky enough to have a job should forget all thoughts of leaving, says Munnell, who co-wrote “Working Longer: The Solution to the Retirement Income Challenge,” published earlier this year. “(But) the problem is, it takes two to tango here. Employers have to be willing to hire people or to retain them.”

Dow falls 427 as stocks hit 5-year lows

By Charley Blaine and Elizabeth Strott

Stocks slumped to their worst levels in more than five years today as fears about the deteriorating economy intensified.

The Dow Jones industrials closed down 427 points, or 5.1%, to 7,997, its first close below 8,000 since March 31, 2003.

The Standard & Poor 500 Index was down 53 points, or 6.1%, to 807, its worst close since March 12, 2003. In the process, the index fell below 819, its intraday low on Nov. 13 and a closely watched support level.

The Nasdaq Composite dropped 97 points, or 6.5%, to 1,386, its first close below 1,400 since April 16, 2003. The Nasdaq-100 Index ($NDX.X) fell 68 points, or 5.9%, to 1,088, its lowest close since April 25, 2003.

Today’s selloff reflected three forces at work:

• A sharp decline in financial stocks. That was, in part, a show of investor unhappiness that the Treasury Department has junked its plan to take over the troubled assets of a number of financial institutions.

• Increasing worries that the recession will be much worse than anyone thought, with deflation problems growing. The Federal Reserve issued new projections today showing unemployment could jump well above 7% next year. Prior forecasts had seen jobless peaking at no more than 6%. The economy is “deteriorating faster than any time since the second quarter of 1980,” former Fed governor Lyle Gramley told Bloomberg Television today. Indeed, the Fed pledged at its Oct. 28-29 meeting to take “whatever steps were necessary to support the recovery of the economy.”

• Fears that inaction in Congress will lead to the collapse of General Motors (GM, news, msgs), Chrysler Group or both.

Citigroup (C, news, msgs) shares fell 23.4% to $6.40, its first close below $7 since May 1995. Bank of America (BAC, news, msgs) fell 14% to $13.06, and JPMorgan Chase (JPM, news, msgs) was down 11.4% to $28.47. The Select Sector SPDR-Financial (XLF, news, msgs) exchange-traded fund, which tracks the financial sector of the S&P 500, fell 10.5% to $10.52.

Meanwhile, the Nasdaq and Nasdaq-100 were pulled lower by weakness in such key technology stocks as Microsoft (MSFT, news, msgs), down 6.8% to $18.29; Apple (AAPL, news, msgs), down 4% TO $86.29; and Cisco Systems (CSCO, news, msgs), down 8.3% to $15.08. (Microsoft is the publisher of MSN Money.)

Google (GOOG, news, msgs) was off 5.8% to $280.18, its lowest close since June 5, 2005. The stock is down 59.5% this year.

In addition, Yahoo (YHOO, news, msgs) was off 20.2% to $9.22, the worst loss among Nasdaq-100 stocks, after Microsoft CEO Steve Ballmer once again ruled out buying the company but expressed interest in resuming talks on a Web search partnership.

• Top Stocks blog: Yahoo shares plunge as Microsoft nixes buy

Adding to the glum mood was the Federal Reserve’s new economic projections, which see unemployment in the United States jumping well above 7% in 2009.

Meanwhile, executives from GM, Ford Motor (F, news, msgs) and Chrysler finished making their case for more government aid to the House Financial Services Committee.

The prospects for actually getting help didn’t look good.

“The problem is the real specter of what we do on the GM front,” Art Hogan, chief market strategist at Jefferies, told CNNMoney. “It’s really hanging over the market right now. It’s the 400-pound gorilla.”

• Get free, real-time stock quotes on MSN Money

Crude oil closed down 77 cents to $53.62 after a government report showed larger-than-expected domestic oil supplies. There was speculation that crude could fall below $50.

All 30 of the stocks in the Dow were lower on the day. Only seven S&P 500 stocks were higher, along with just one Nasdaq-100 stock: software maker CA Inc. (CA, news, msgs), up 0.2% to $15.30.

With today’s losses, the Dow is down 39.7% for the year. The S&P 500 is down 45.1%, and the Nasdaq is off 47.7%. From highs in October 2007, the Dow has fallen 43.5%, with the S&P 500 off 48.5% and the Nasdaq off 52%.

Asian stocks fell overnight. Japan’s Nikkei 225 Index fell 0.7%, Hong Kong’s Hang Seng Index was down 0.8%, and the MSCI Asia Pacific Index lost 0.8%.

Stocks were down in Europe, as well. London’s FTSE 100 Index was down 4.8%, and the broader DJ Stoxx 600 Index had shed 4%.

Big Three continue to plead for help

The automakers want an additional $25 billion in aid from the government’s $700 billion financial-rescue fund, and have said that loan would be enough to help them make it through 2009.

In September, Congress approved a $25 billion loan to the automakers to help them convert to more fuel-efficient vehicles.

Shares of GM tumbled 9.7% to $2.79 today, a price not seen since 1942. Ford was down 25% to $1.26. Chrysler is privately held.

One analyst said GM might not make it to the end of the year without help. “Without fresh capital, we project that GM may not have sufficient liquidity to make it to year end,” Deutsche Bank analyst Rod Lache wrote in a note to investors this morning.

Automotive analyst George Magliano of Global Insight told CNBC today that a collapse of Chrysler and GM would cost the economy 1.5 million jobs. He agreed with the auto companies that a bad situation this year was made worse in October when the government let investment house Lehman Bros. fail. That seized up credit markets and made getting a loan or auto lease much more difficult.

The Lehman decision means a “much deeper recession and much slower economy,” he added.

• Read more: What if GM goes broke?

“What would it mean if the domestic industry were allowed to fail?” GM Chief Executive Officer Rick Wagoner argued in prepared testimony before both the Senate Banking Committee and the House Financial Services Committee.

“The societal costs would be catastrophic — 3 million jobs lost within the first year, U.S. personal income reduced by $150 billion, and a government tax loss of more than $156 billion over three years.

• Top Stocks blog: How many jobs are tied to the Detroit 3?

“Such a level of economic devastation would far exceed the government support that our industry needs,” Wagoner said. “This is about much more than just Detroit. It’s about saving the U.S. economy from a catastrophic collapse.”

GM even took out a full-page advertisement in today’s Wall Street Journal that said that the automaker has taken steps to “position GM for long-term success.” GM spent about $207,000 on the ad, according to CNBC.

Stock Charts (Year)

General Motors

Ford Motor

One expert believes the cost to consumers will be high if the automakers fail.

“Vehicles could cost anywhere from 5% to 15% more, maybe even more than that,” Michael Robinet, vice president of global vehicle forecasts for auto consultant CSM Worldwide, told CNNMoney.com.

Yet the prospect of a bailout for the automakers looks pretty grim: Senate Finance Committee Chairman Christopher Dodd, D-Conn., said there is a remote chance at best that an aid bill will come out of the Senate.

• Learn how to invest with our New Investor Center

“Their boardrooms, in my view, have been devoid of vision,” Dodd said Tuesday. “They have promoted and often driven the demand of inefficient, gas-guzzling vehicles, and dismissed the threat of global warming.”

Consumer prices, housing starts plunge

Consumer prices fell a record 1% in October, the Labor Department reported this morning — the biggest year-over-year drop since 1947.

Energy prices plunged 8.6%, also a record, in October. Gasoline prices fell 17% in October from September, according to the AAA.

Economists had expected a decline of 0.9% last month, following a flat reading in September.

Core prices, which exclude volatile food and energy prices, fell 0.1% last month, the first core CPI decline since 1982. Economists had expected the core Consumer Price Index to rise 0.1%.

On Tuesday, the Labor Department said producer prices plunged 2.8% in October, the biggest year-over-year decrease since 1947.

Meanwhile, new housing data provided more grim news. Housing starts fell 4.5% to a seasonally adjusted annual rate of 791,000 in October — the slowest pace since the Commerce Department started tracking the data in the late 1940s.

Economists had actually expected an even worse decline to 776,000 after a 3% drop to a revised rate of 828,000 units in September.

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Housing starts are down about 70% from a peak annual rate of approximately 2.2 million in late 2005 and early 2006. They are down 38% over the past year.

Building permits fell 12% in October to an annual rate of 708,000, falling below a previous low of 709,000 in March of 1975.

The housing slump has been the source of many of the economic and financial problems that have plagued the markets in recent months.

On Tuesday, the National Association of Home Builders reported that builder sentiment has fallen to a record low.

Citigroup to wind down SIVs

Citigroup shares tumbled after the company announced it will acquire the remaining $17.4 billion in assets held by structured investment vehicles (SIVs) that the banking giant manages.

The value of the funds has fallen from $21.5 billion as of Sept. 30.

SIVs are funds that borrow money by issuing short-term securities at a low interest rate, later lending the money through purchases of long-term securities at higher interest rates.

Citigroup invented the investment vehicles back in 1988 but suffered tremendously this year as the assets sank in value amid the credit crunch and mortgage-market meltdown.

The move is the latest by Citi to try to regain profitability after four quarters of losses and a huge drop in its stock price.

Boeing will delay deliveries

Aircraft maker Boeing (BA, news, msgs) is changing its production schedule to cope with the work stoppage caused by a recent 58-day strike by its machinists union. Boeing will add up to 10 weeks to the delivery dates for aircraft, The Wall Street Journal reported this morning.

Boeing is not expected to discuss details until early next month.

Boeing shares fell 5.3% to $37.48.

Fannie Mae to be delisted from NYSE?

Fannie Mae (FNM, news, msgs) said late Tuesday that the New York Stock Exchange notified the government-backed mortgage company that it is deficient in listing standards and could be delisted.

Fannie Mae shares have closed under $1 for more than 30 consecutive trading sessions through Nov. 12.

The company’s stock fell 19.2% to 38 cents.

Fannie Mae has to tell the NYSE what it plans to do to remain compliant by Nov. 26.

GE to restructure financing arm

General Electric (GE, news, msgs) late Tuesday said it is reorganizing GE Capital, its financing division, to save $2 billion in costs next year. The restructuring will mean job cuts, but the company did not specify how many jobs will be lost.

GE Capital has “evolved to the point where we think we are going to be smaller in 2009,” the division’s Chief Operating Officer Bill Cary said in a video on the company’s Web site.

GE CEO Jeff Immelt has been taking steps to reduce the size of the conglomerate’s finance businesses in the wake of the financial crisis.

Shares of GE dropped 10% to $14.45. GE shares are down 61% this year.

Andrew Rosenbaum contributed to this report.

Citi slashes

53,000 jobs

By Charley Blaine and Elizabeth Strott

Citigroup (C, news, msgs) said it will slash approximately 53,000 jobs, bringing its total employee count to 300,000 — increasing investor jitters about the economic slowdown.

download it now and take action

download it now and take action

Chief Executive Officer Vikram Pandit announced the cuts at a town hall meeting this morning. Pandit also said the company will cut expenses by 20% to about $50 billion next year. Citi shares slipped 25 cents, or 2.6%, to $9.27 on the news.

Stocks were falling by midday on continued worries about the economy. At 11:45 a.m. ET, the Dow Jones Industrial Average was down 175 points to 8,322 after slumping 338 points Friday. The Nasdaq Composite Index had shed 27 points to 1,490 and the Standard & Poor’s 500 Index had lost 18 points to 855.

Crude oil was down 8 cents to $56.96 a barrel this morning.

Citigroup has lost more than $20 billion in the past four quarters.

• Get free, real-time stock quotes on MSN Money

Meanwhile, Britain’s Sunday Telegraph reported that JPMorgan Chase (JPM, news, msgs) will slash thousands of jobs as well. The paper said JPMorgan’s cuts will be comparable to rivals’ moves.

Citi and Goldman Sachs (GS, news, msgs) have already cut about 10% of their work forces.

Goldman execs give up bonuses

Top executives at Goldman Sachs will not be taking home bonuses this year.

Chief Executive Officer Lloyd Blankfein, Chief Financial Officer David Viniar, co-presidents Jon Winkelreid and Gary Cohn and vice chairmen J. Michael Evans, Michael Sherwood and John S. Weinberg asked the company’s board to forgo giving them their year-end bonuses because of the crumbling economy.

“Our senior officers decided on this course of action because they believe it is the right thing to do,” a Goldman spokesman said.

In 2007, Blankfein took home a bonus of $68.5 billion in cash and stock.

Goldman stock fell $3.55, or 5.3%, to $63.18 in morning trading. Shares have slumped 69% since the beginning of the year.

Target profit falls

Target (TGT, news, msgs) missed the bulls-eye in the third quarter.

The retailer posted a 24% drop in profit, as consumers held onto their wallets amid the financial crisis. It was the company’s fifth straight quarter of profit declines.

• Read more: 5 reasons you’re shopping at Wal-Mart now

Target earned $369 million, or 49 cents per share, down from the $483 million, or 56 cents per share, it earned in the same quarter a year ago. The results topped Wall Street’s estimate by a penny.

Target also said it is temporarily suspending all of its stock buybacks and announced that it will cut its capital spending plan in 2009 by $1 billion.

“The current environment and our financial outlook have naturally reduced our appetite for investment in our business, and we have also temporarily suspended substantially all of our share repurchase activity,” Chief Financial Officer Doug Scovanner said in a statement.

Stock Charts (Year)

Citigroup

JPMorgan Chase

Goldman Sachs

Shares of Target were down 49 cents, or 1.5%, to $32.54 by midday.

Japan falls into recession

Japan’s economy has officially fallen into recession territory, according to the latest data.

Japan’s Cabinet Office said that the economy shrank by 0.1% in the third quarter, following a 0.9% decline in the second quarter. Two consecutive quarters of economic contraction is the technical definition of a recession. Japan’s economy is the second-biggest in the world, following the U.S. economy.

• Check out our New Investor Center

In Asia, stocks were mostly lower in the overnight session. Japan’s Nikkei 225 Index was down 2.7% and the Hong Kong Hang Seng Index shed 0.1%, but the MSCI Asia Pacific Index managed to gain 0.7%.

In Europe, stocks were falling this morning. London’s FTSE 100 Index lost 2.4%, the German DAX 30 Index was down 3.3%, and the broader DJStoxx 600 Index was down 2.6%.

More economic weakness

For better or worse, investors will gain visibility into the strength of the economy this week, with the release of a number of important reports.

A reading on the manufacturing industry in the New York region showed continued weakness. The New York Empire State manufacturing index fell to a record low of negative 25.4 in November from a reading of negative 24.6 in October. The reading was slightly better than the negative 26 economists had expected.

Negative readings indicate contraction.

A survey by the National Association for Business Economics said economists expect a recession in the U.S. to last through 2009.

“Business economists became decidedly more negative on the economic outlook for the next several quarters as a result of the intensification of credit-market stresses,” said Chris Varvares, president of the association.

The NABE survey offered dismal forecasts for auto sales, consumer spending and the housing market. A mere 40% of the economists polled believe the Treasury Department’s financial rescue plan will help boost growth, while 48% of respondents said the housing market would not bottom before the middle of next year.

Investors can gauge inflation with the Producer Price Index and the Consumer Price Index, which come out Tuesday and Wednesday mornings, before the start of trading.

The PPI is expected to decline by 1.5% in October after falling 0.4% in September, and the CPI is expected to fall 0.8% in October following a flat reading in September.

Inflation had been a major concern for the government before the economic crisis sapped demand in summer and early fall.

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Housing still a mess

On Wednesday, investors will get fresh data on the housing market. Housing starts are expected to have fallen to a seasonally adjusted annual rate of 776,000, in October after slumping to a level of 817,000 in September.

“History and the natural rate of household formation would suggest that we are near the bottom of a two-year slide, but the outstanding stock of new homes and the overall health of the economy point to even further declines ahead,” CIBC World Markets economist Meny Grauman wrote in a note to clients.

According to a press release from James Hardie Industries (JHX, news, msgs) — the biggest home siding seller in the U.S. — housing starts are down 65% from a peak of about 2.2 million monthly in late 2005 and early 2006.

This morning, home-improvement retailer Lowe’s (LOW, news, msgs) posted third-quarter earnings of $488 million, or 33 cents per share, a 24% decline from the $643 million, or 44 cents per share, in the same period a year ago.

Still, the results were better than analysts’ expectations of 28 cents per share.

Lowe’s said it expects fourth-quarter profit to be between 8 cents and 16 cents per share; the consensus estimate is for 18 cents per share for the current quarter.

The stock was up $1.29, or 7.1%, to $19.52 by late morning.

G-20 announce plans to tackle economic crisis

Leaders from around the world were in Washington this weekend to discuss the slumping global economy.

Leaders from the Group of 20 nations, which make up about 85% of the world’s economy, said they will continue to work on individual efforts to boost their economies. They also announced a common framework for action to promote world economic growth in the first three months of 2009.

“Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries,” the G-20 said in a statement.

The summit communiqué outlined plans to take a critical look at executive compensation. It also called for more transparency in the credit default swap and derivatives markets. Broadly speaking, world leaders have agreed that the world’s biggest financial companies need closer supervision.

“It was a very productive summit meeting,” President Bush said at the summit’s conclusion.

Analysts were not convinced.

“The statement was a bland recitation of past policy initiatives, coupled with comments that were blindingly obvious,” UBS economists wrote in a note to clients.

The G-20 leaders said they will meet again on April 30, 2009.

Andrew Rosenbaum contributed to this report.

Your 5-minute guide

to saving your retirement

By MSN Money staff

Spend less and save more. That’s what the experts advise if you’re getting a late start on retirement savings. Chances are you’ll also have to work longer than you expected.

Don’t despair and don’t panic. Many Americans are in the same boat, but there are still ways to catch up.

First, get an idea of your expected post-retirement expenses. Start with MSN Money’s Retirement Expense Calculator. If you are new to investing or want to brush up on what you already know, there are short online courses in MSN Money’s New Investor Center.

The basics: Social Security

The next step is to look into Social Security. You’ll probably get benefits, but they likely won’t fund a comfortable lifestyle. A third of current retirees rely on Social Security for at least 90% of their income, and the average monthly check is $1,007. (See “Could you survive on Social Security?“)

• Figure out what your future benefit will be by checking your annual Social Security statement. If you’re in your 50s or younger, anticipate that the amount will be smaller than the estimate. A reduction in future benefits may be one way Congress tries to keep Social Security solvent beyond 2041. (See “Your free financial report card.”)

• Don’t be tempted to start collecting at age 62. You’ll get a smaller monthly check for life — 20% to 30% less — than if you wait until you’re fully eligible. For most folks, that’s not 65. For anyone born after 1937, retirement age increases by two months per year until it stabilizes at age 66 for people born between 1943 and 1954. After another gradual increase, it’s 67 (at least for now) for folks born in 1960 or later. See the Social Security Administration’s Retirement Planner.

• You’ll get a larger Social Security check if you don’t start collecting as soon you’re eligible. Benefits increase 6% to 8% each year you delay until age 70.

Just do it — now

Now that you know what the government will likely kick in, turn your attention to trimming expenses and boosting your savings. Start with MSN Money’s Retirement Income Calculator and see “8 money moves you must make at 50.”

• Make a list of essential expenses and put retirement savings in the No. 1 spot. (See “55 and haven’t saved a dime? Yikes.”)

• Reduce spending wherever you can and, most importantly, pay off credit card debt. (See “Living ‘poor’ and loving it” and “Your 5-minute guide to budgeting.”)

• Take advantage of benefits available to retirees by exploring senior discounts at aarp.org and other Web sites. In addition, seniors can get help paying for food, utilities and other essentials. Use the Eldercare Locator.

• Maximize your contribution to your employer’s tax-deferred retirement plan. Then make the maximum contribution to an IRA. If you’re self-employed, consider a Keogh plan in addition to an IRA. (See “The vanishing safety net.”)

• Federal law allows older workers to play catch-up. Those 50 and older can put an extra $1,000 into an IRA (for a total of $6,000 in 2008) and an extra $5,000 into a 401(k) or similar tax-deferred employer plan (for a total of $20,500 in 2008). (See “Saving strategies for the over-50 crowd.”)

It’s Time to Rethink Our Retirement Plans

Let’s fix what isn’t working, before the next financial crisis.

By ROGER W. FERGUSON JR.

While our nation has experienced other financial crises, the current one is the first to occur when so many Americans bear so much responsibility for their own retirement savings. Never before have those savings been as exposed to the markets, as workers are now experiencing acutely. While stocks will eventually recover, we should take time to rethink how Americans achieve lifetime financial security — and the mechanisms in place to help them do it.

Traditional pension benefits can no longer be relied upon when global competition and rapid technological change challenge the ability of even the greatest companies to make good on future commitments. Moreover, Americans switch employers and even careers several times over the course of their working lives.

Yet the 401(k)s and other accounts that have replaced those pensions are not producing sufficient retirement savings. According to the McKinsey Global Institute, two-thirds of Americans between the ages of 54 and 63 have not saved enough for retirement. It’s not that 401(k)s are bad, it’s just that they were conceived as supplementary retirement vehicles, not as a holistic retirement system.

A new approach, combining the best of traditional pensions and new savings vehicles, is needed. Here are the elements:

- Automate participation and savings. Automatically enrolling employees in plans, then hiking savings with pay raises, overcomes the inertia that results in nearly a quarter of workers eligible for an employer-sponsored retirement plan not signing up. Automatic enrollment plans should mandate employer and employee contributions, and the percentage amounts of each. That’s the approach some higher-education retirement plans follow. It may be one reason why 35% of faculty feel very confident in their retirement income prospects, compared with 25% of working Americans, according to the TIAA-CREF Institute.

- Give workers the information they need. Most of us need advice that is objective — from an adviser who receives no sales commission and thus has no incentive to push particular products — and tailored to our individual goals. Retirement plans must include such advice for everyone who signs up.

- Guarantee an income floor. Many retirement accounts focus on accumulation, but fail to include a payout mechanism to ensure retirees will not outlive their savings. Retirement plans should provide that by automatically converting all or a portion of the account balance to a low-cost annuity at retirement.

- Encourage health-related savings. According to the Employee Benefit Research Institute, a couple that retires today will need from $200,000 to $635,000 to pay out-of-pocket health-care costs (above Medicare). Few private-sector employers offer workers an account to save for such costs. Last year’s agreement among the Big Three automakers and the United Auto Workers to establish tax-free trusts for worker health is an approach gaining favor among academic institutions. Now Congress needs to enable people with these accounts to leave any unused balance to heirs. This will encourage people to hold on to their savings until the last years of their lives, when health-care money is most needed.

- Diversify risk. If you had all your retirement in stocks, your account lost about 40% in recent weeks. If you had a mix of stocks and fixed-income holdings, you’re down about 20%. Individuals need to properly diversify, and rebalance their accounts regularly to maintain a prudent mix of assets.

Taken together, these measures offer a way to convert our patchwork of individually owned accounts into a stronger retirement system. All are achievable, provided that policy makers, public officials and companies seize the opportunity this crisis presents to help ensure that workers will have the retirement savings they’ll need.

Mr. Ferguson, a former vice chairman of the Federal Reserve, is president and CEO of TIAA-CREF, which manages retirement savings for 3.6 million individuals and 15,000 institutions. He is also a member of President-elect Obama’s Transition Economic Advisory Board.

Some Firms Suspend Their 401(k) Match

By JILIAN MINCER

As the economy worsens, a growing number of small businesses are suspending their 401(k) match, and, in some instances, closing the retirement plans altogether.

While only about 15% to 20% of small businesses offer a 401(k) plan, many added them in recent years to attract and retain workers and to help business owners save for retirement. But the economic downturn and higher health-insurance costs are forcing companies to cut back on retirement benefits.

“It’s a cash-flow issue,” says Patrick M. Shelton, a partner at Benefit Plans Plus LLC, a third-party administrator of retirement plans in St. Louis. “The companies don’t have money to meet payroll and medical insurance, so they’re cutting back on 401(k) plans.”

The small business market — companies with fewer than 500 workers — had been one of the fastest-growing segments of the defined-contribution market.

‘Critical’ Benefit

A 2007 survey of small businesses by Fidelity Investments found the plans were very important to workers. Almost 70% of the employees said a retirement plan “was critical or very important for businesses to attract and retain employees.” The study also found that 49% of employees who had retirement plans said they wouldn’t move to companies without them.

But as the economy has worsened, more businesses have changed their retirement plans. “We’re definitely seeing that small business exit, and we expect to see it continue through 2009,” says Mr. Shelton of Benefit Plans Plus. “I think the first six months of next year will be off for everyone.”

Mr. Shelton says he has seen 12 plans terminated in 2008 compared with six for all of 2007. The hardest-hit companies are those in the housing-construction, mortgage and trucking industries.

Wells Fargo & Co. also has seen a slight increase in small business 401(k) plan closings.

“It’s not a huge or significant increase, but it’s more than we consider normal,” says Laurie Nordquist, executive vice president Wells Fargo Institutional Trust Services. She says the trend was apparent at the beginning of the year, “even before we had the equity-market volatility in September and October.” In some instances, the companies are closing the plans because of a reduced work force.

“We are seeing a slight uptick in plan terminations by businesses who can’t afford the plans or are going out of business,” says Laurie J. Shultz, vice president, Emerging Markets Segment for the Retirement and Investor Services division of Principal Financial Group Inc.

“The businesses only have so much money for benefits,” she says. “The No. 1 benefit for attracting and retaining employees is medical benefits.”

Ms. Shultz says it’s much more common to see a business suspend the match than close the plan. The current economy could result in a slowdown in the creation of new plans. Ms. Shultz says there’s no change currently “in new startup plans, but what we are seeing in our pipeline is a slight downturn.”

Saving Money

Many more companies, large and small, are opting to suspend the company match this year to save money, including General Motors Corp. and Ford Motor Co., which recently announced they would eliminate the 401(k) match for salaried workers.

A survey released in October by consulting firm Watson Wyatt found that 2% of employers already have reduced their 401(k) or 403(b) match. An additional 4% plan to take the action in the next 12 months.

Shaun T. King, an investment adviser at Hickok & Boardman Retirement Solutions in Burlington, Vt., says, “We’re definitely seeing companies cut back on the amount of the match they put in.”

Companies, he says, are looking at ways to decrease costs. But once a 401(k) plan is set up, he says, most of the cost can be shifted to the employees.

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WASHINGTON – Hedge-fund managers are defending their industry at a congressional hearing Thursday, testifying that hedge funds didn’t cause the current economic crisis and some saying they shouldn’t be subject to stricter regulation in the future.

Reuters

Hedge fund manager George Soros is sworn in to testify.

However, experts on a panel of witnesses argued that regulators need to tighten oversight of the $2 trillion industry, with one calling for tax increases on the industry.

“When hedge funds become too big to fail, that poses a problem for the financial system,” said Andrew Lo, Director of the Massachusetts Institute of Technology Laboratory for Financial Engineering.

House Oversight and Government Reform Committee Chairman Henry Waxman (D., Calif.) called the hearing to examine the role of hedge funds in the financial markets. He invited five hedge fund managers who earned an average of $1 billion last year.

In opening remarks, Waxman called hedge funds “virtually unregulated” and noted that the industry has swelled over the last decade. “Regulators aren’t even certain how many hedge funds exist or how much money they control,” he said.

Rep. Tom Davis of Virginia, the ranking Republican on the panel, said hedge fund losses are more an effect, rather than a cause, of the financial crisis. But he predicted that the lightly regulated investment pools would now endure more scrutiny from investors and regulators.

“Going forward, hedge funds will have to take account of a reduced tolerance by investors and governments for an unregulated parallel financial universe of exotic derivatives run by faceless quants that exerts unpredictable gravitational forces on the marketplace,” Mr. Davis said in opening remarks.

Mr. Lo said hedge funds should be required to file confidential reports to regulators detailing their positions, and he urged Congress to create a financial-wreckage squad to issue public findings on the causes of market failings, similar to reports on plane crashes.

Hedge fund managers defended their industry, pointing to other causes of the financial stress.

James Simons, chairman of Renaissance Technologies LLC, blamed regulators who took a “hands-off position” toward investment banks and credit default swaps, a kind of insurance against defaults by borrowers. He said credit-rating agencies were at fault for giving high ratings to shaky investments. He maintains that hedge funds weren’t part of the problem.

Hedge funds, which are lightly regulated investment pools for wealthy individuals and institutions, “did not cause the financial crisis and are in fact helping to mitigate its damage,” saving taxpayers’ money, according to testimony by Houman Shadab, a senior research fellow at the Mercatus Center at George Mason University.

He said tightening regulation on hedge funds now could increase economic instability, making matters worse.

But former Securities and Exchange Commission Chairman David Ruder, now a Northwestern University Law School professor, called for closer regulation of hedge funds, and some hedge fund managers agreed.

Harbinger Capital Partners Fund co-founder and Senior Managing Director Philip Falcone said he supports more public disclosure by hedge funds and the creation of a public clearing house for derivatives trading, particularly in credit default swaps.

Citadel Investment Group CEO Kenneth Griffin endorsed the clearing house approach, saying it is a “straightforward solution” to the lack of information on such swaps and would “dramatically reduce systemic risk.”

Committee Democrats criticized the tax rates paid by hedge fund managers, an issue that dominated the congressional debate over tax reform last year.

Mr. Waxman, whose panel doesn’t have jurisdiction over tax matters, said hedge funds receive tax breaks that “allow them to treat the vast majority of their income as capital gains.”

Rep. Elijah Cummings (D., Md.) said, “I hope we can correct this injustice once and for all next year.”

Managers of a broad array of partnerships pay capital gains rates, rather than ordinary income rates as high as 35%, on a portion of their pay, dubbed “carried interest.”

For private equity managers who often make longer-term investments, the 15% long-term capital gains rate generally applies. However, hedge fund managers are more likely to hold investments for less than one year. Ordinary income rates apply to such investments.

Stanford law professor Joseph Bankman argued that the taxation of carried interest was neither fair nor efficient.

Billionaire investor George Soros presented a blow-by-blow account of the financial crisis and offered a bleak outlook for the economy. “A deep recession is inevitable and the possibility of a depression cannot be ruled out,” he said. Mr. Soros argued that the events of recent months undercut what he called the prevailing theory of markets — that they always return to equilibrium and that deviations are caused by random, external events.

Mr. Soros said the current crisis wasn’t caused by an outside shock, such as a surge in energy prices, but by the financial system itself. He argued that a flawed theory of markets had been used to justify unbridled free-market capitalism and deregulation. He described his own theory, dubbed reflexivity. It says that financial markets present a distorted view of underlying reality, which affects market prices.

Write to Judith Burns at judith.burns@dowjones.com and Jessica Holzer at jessica.holzer@dowjones.com

Derivatives the new ‘ticking bomb’

Buffett and Gross warn: $516 trillion bubble

is a disaster waiting to happen

Today 11.13.08  Total Derivatives Over $600 Trillion

By Paul B. Farrell, MarketWatch

Last update: 7:31 p.m. EDT March 10, 2008

Comments: 396

“We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

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1. Sarbanes-Oxley increased corporate disclosures and government oversight
2. Federal Reserve’s cheap money policies created the subprime-housing boom
3. War budgets burdened the U.S. Treasury and future entitlements programs
4. Trade deficits with China and others destroyed the value of the U.S. dollar
5. Oil and commodity rich nations demanding equity payments rather than debt

• U.S. annual gross domestic product is about $15 trillion
• U.S. money supply is also about $15 trillion<