Why is This Topic Important to Wealth Managers? This blogticle discusses the debt limit debate. We present discussion directly from the Administration including the Department of the Treasury. Wealth managers who are following the debt debate discussion will likely be interested in our presentation of insider comments.

As almost the entire world knows at this point, the U.S. reached the debt limit on May 16, 2011. To plug the gap, the Treasury Department has employed three measures to temporarily extend our ability to meet the nation’s obligations.  Those measures, in order taken, are (1) suspending issuance of State and Local Government Series (SLGS) Treasury securities; (2) declaring a “debt issuance suspension period” of the Civil Service Retirement and Disability Fund (CSRDF); and (3) suspending reinvestment of the Government Securities Investment Fund (G Fund).

It is said that these four extraordinary measures allow the Treasury to extend borrowing authority until August 2, 2011. Here’s what Treasury has said about the debt limit over the past few weeks:

7/12 Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following statement reaffirming the projected date on which the United States will exhaust borrowing authority under the statutory debt limit.

“The Treasury Department continues to project that the United States will exhaust its borrowing authority under the debt limit on August 2, 2011.  Secretary Geithner urges Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner.”

7/13 Treasury Secretary Tim Geithner made a brief statement to the press:

There is unanimity in that room that we are a country that meets its obligation, we are a country that pays our bills and that we’ll act and do what’s necessary to make sure that we can maintain that commitment. As the Majority Leader said, we have looked at all available options and we have no way to give Congress more time to solve this problem and we are running out of time.

And the eyes of the country are on us, and the eyes of the world are on us and we need to make sure we stand together and send a definitive signal that we are going to take the steps necessary to avoid default and also take advantage of this opportunity to make some progress in dealing with our long-term fiscal problems. We don’t have much time; it’s time we move.

7/14 The U.S. Department of the Treasury released the following statement from Under Secretary for Domestic Finance Jeffrey Goldstein on the Standard and Poor’s (S&P) downgrade:

“[This} action by S&P restates what the Obama Administration has said for some time: that Congress must act expeditiously to avoid defaulting on the country's obligations and to enact a credible deficit reduction plan that commands bipartisan support.”​

7/15 U.S. Department of the Treasury releases the following statement from Jeffrey Goldstein, Under Secretary for Domestic Finance, regarding the use of the last of the previously mentioned measures available to keep our nation under the statutory debt limit, suspension of reinvestment of the Exchange Stabilization Fund.

“Today, as previously announced, the Treasury Department will suspend reinvestment of the Exchange Stabilization Fund, the last of the measures available to keep the nation under the statutory debt limit.  In order to prevent a default on the nation’s obligations, Congress must enact a timely increase of the debt ceiling.”

Finally, to quote President Obama from his address earlier this week:

“[American workers] are fed up with a town where compromise has become a dirty word.  They work all day long, many of them scraping by, just to put food on the table.  And when these Americans come home at night, bone-tired, and turn on the news, all they see is the same partisan three-ring circus here in Washington.  They see leaders who can’t seem to come together and do what it takes to make life just a little bit better for ordinary Americans.  They’re offended by that.  And they should be.”

Tomorrow’s blogticle would ideally present the terms of the debt agreement, but if not, we’ll discuss life insurance.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Today we discuss foreign investment in the U.S. both private and public. The data shows a growth in the U.S. investment sector. The evaluation provides wealth managers information regarding global economic investment in the U.S.

This Treasury and Federal Reserve recently presented data and analysis regarding the latest annual survey of foreign portfolio holdings of U.S. securities. The survey measured positions as of June 30, 2010.

The annual survey measured foreign holdings of U.S. securities as of June 2010 at $10,691 billion. Of the over $10 trillion of foreign holdings $9,736 billion were holdings of U.S. long-term securities (original term-to-maturity greater than one year) and $956 billion were holdings of U.S. short-term securities.

In the previous survey as of June 30, 2009, total foreign holdings amounted to $9,641 billion.  The increase over the 12-month period from June 2009 to June 2010 – $1,050 billion – more than reversed the decline in total foreign holdings of U.S. securities in the 2009 survey.  Foreign holdings of equity rose $562 billion to $2,814 billion.  The increase in part reflected the rebound in stock prices between the 2009 and 2010 survey dates, but even so, foreign holdings of U.S. equity remained below the level recorded in 2008 (value of holdings is determined at fair market).  Foreign holdings of U.S. long-term debt securities rose $681 billion over the same period.  This increase was more than accounted for by a record increase in holdings of long-term Treasury securities, which rose $739 billion to reach a level just above $3.3 trillion.

In contrast, foreign holdings of long-term agency securities decreased further from the peak recorded in June 2008.  Foreign holdings of long-term corporate securities edged up slightly over the 12-month period.  Foreign holdings of U.S. short-term securities decreased $193 billion to $956 billion.  Foreign holdings of U.S. Treasury bills and certificates, short-term U.S. agency securities and short-term corporate debt securities all declined.

At $9,736 billion, foreign holdings of U.S. long-term securities continue to be considerably larger than U.S. holdings of foreign securities, estimated at $5,175 billion as of end-June 2010.  Moreover, foreign holdings of U.S. long-term securities increased $1,244 billion during the 12-month interval between the 2009 and 2010 surveys, more than the $560 billion that U.S. holdings.

Foreign securities are estimated to have increased over the same period.  As a result, the ratio of U.S. holdings to foreign holdings decreased to 0.53 and the net position in long-term securities holdings widened further to -$4.6 trillion.  In June 2010, foreign holdings of U.S. long-term securities exceeded the previous peak recorded in June 2008, but U.S. holdings of foreign securities were estimated to be still below the peak recorded in June 2007.

The data show that at $1,611 billion, total holdings attributed to mainland China exceeded those attributed to any other country, surpassing holdings by Japan ($1,393 billion) for a second year.  Holdings attributed to residents of the United Kingdom were third at $798 billion.  The United Kingdom had been one of the top two investing countries in U.S. securities since country-level data became available (1978), but the United Kingdom fell into the third position behind the rapidly growing stock of holdings of China in the 2006 survey.  The United Kingdom remained the largest holder of U.S. equity in 2010, while China remained the largest holder of debt securities.

Long-term U.S. Treasury securities held by China amounted to $1,108 billion, up from $757 billion a year ago.  In addition, $4 billion of the $5 billion in short-term securities held by China were U.S. Treasury bills and certificates, bringing China’s total holdings of U.S. Treasury securities to $1,112 billion.  Notably, China has reduced its holdings of short-term debt since June 2009 by $155 billion but has increased its holdings of long-term Treasuries.  Japan was the second largest holder of U.S. Treasury securities, with total holdings of $799 billion, of which $737 billion were long-term Treasury securities and $62 billion were short-term securities.

Since the 2004 survey, China’s holdings of U.S. securities have more than quadrupled.

Tomorrow’s blogticle will continue to discuss tax and market issues relating to wealth management.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Today we present a report, data and analysis concerning the current conditions of the housing market. This discussion will benefit wealth managers who are closely involved with many aspects of clients’ financial planning including home and real estate investment.

The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury recently released the May edition of the Obama Administration’s Housing Scorecard. The report found, in part, that Bank of America, J.P. Morgan Chase, and Wells Fargo are in Need of Substantial Improvement under the Making Home Affordable Program.

This month’s report provided detailed assessments for the 10 largest mortgage servicers participating in the Administration’s Making Home Affordable Program. The report is designed to provide greater transparency about servicer performance in the program. In addition, the new assessments are intended to prompt mortgage servicers to correct identified deficiencies to improve program implementation and more effectively reach eligible homeowners.

Since the inception of the Making Home Affordable Program, Treasury has required participating servicers to take specific actions to improve their servicing processes.  The new Servicer Assessments summarize performance for the 10 largest Making Home Affordable participating servicers from reviews largely conducted throughout the first quarter of 2011 on three categories of program implementation: identifying and contacting homeowners; homeowner evaluation and assistance; and program reporting, management and governance.

As the Administration is taking additional steps to push servicers to provide more effective assistance to struggling homeowners through its foreclosure prevention programs, the continued “fragility” of the housing market demonstrates the need for continued recovery efforts in hard hit communities:

• The efforts have helped millions of families deal with the worst economic crisis since the Great Depression.  More than 4.8 million modification arrangements were started between April 2009 and the end of March 2011. While some homeowners may have received help from more than one program, the total number of agreements offered more than doubled the number of foreclosure completions for the same period (2 million).
• Housing market remains fragile as data through May paint a mixed picture of recovery. Home prices remain weak after several straight months of decline. However the Treasury notes one report which shows a minor month-over-month increase for April, and mortgage delinquencies continued a downward trend compared to early 2010. Foreclosure starts and completions remain below peak, though as lenders continue to review internal procedures related to foreclosure processing many foreclosure actions may have been delayed.

Also featured this month was the first Housing Scorecard Regional Spotlight, which highlights recovery conditions in Phoenix, Arizona, one of the hardest hit areas in the nation following the housing market downturn and an area where the Administration’s broad approach to stabilizing the housing market has been very active.

• Phoenix home prices showed signs of stabilizing during most of 2009 and the first half of 2010, but the overall sales market remains fragile. The home sales market remains soft in Phoenix. Existing home sales rose from 2008 to 2009, though the boost was due in part to sales of distressed homes — foreclosures and short sales – which currently represent 56 percent of all existing homes sales in the MSA, compared with 35 percent nationally.

• More than 100,000 Phoenix households have received mortgage modifications, many through direct Administration programs. Since April 1, 2009 more than 65,000 mortgage assistance interventions have been offered to Phoenix area homeowners through the Administration’s assistance programs and an estimated 40,000 to 42,000 proprietary modifications have been offered through Hope Now Alliance servicers – a total of 106,500 interventions for the metropolitan area. While some homeowners may have received help from more than one program, more assistance has been offered than foreclosures completed during this period (104,500).

Tomorrow’s blogticle will continue to discuss tax and market issues relating to wealth management.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Today we present a discussion on the national debt limit. This special report discusses the issue surrounding the national budget troubles. Because the topic is being discussed throughout the country and around the world, wealth managers may be in a better position to advise clients knowing the details of the federal financial position.

Generally, the debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments. The debt limit does not authorize new spending commitments. It simply allows the government to finance existing legal obligations that Congresses and presidents of both parties have made in the past.

Failing to increase the debt limit would likely have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would likely precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents.  In the coming weeks, Congress must act to increase the debt limit. Congressional leaders in both parties have recognized that this is necessary

However, last week Mary Miller, Assistant Secretary for Financial Markets at the U.S. Department of the Treasury, issued the following statement reaffirming the projected date on which the United States will exhaust borrowing authority under the statutory debt limit.  Treasury has committed to providing Congress with updates each month of when extraordinary measures taken to keep the nation from defaulting will be exhausted.

“On the basis of careful analysis of actual and projected revenues and expenditures, the Treasury Department continues to project that the United States will exhaust its borrowing authority under the debt limit on August 2, 2011.  Secretary Geithner continues to urge Congress to avoid the catastrophic economic and market consequences of a default crisis by raising the statutory debt limit in a timely manner.”

If Congress fails to increase the debt limit, the government would have to stop, limit, or delay payments on a broad range of legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and many other commitments.

Defaulting on those legal obligations would also likely cause severe hardship for American families. Additionally, it would call into question the full faith and credit of the United States government – a pillar of the global financial system. The ensuing financial crisis from a default , as mentioned above, would have catastrophic economic consequences, potentially including the loss of millions of American jobs. And it would likely lead to higher borrowing costs, reduced retirement savings, and lower home values for families across the nation.

Tomorrow we revert back to our series and discussion on wealth management in today’s economic environment.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? Today we continue our series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation. That being said each blogticle resumes discussion from the previous day.

As was discussed yesterday, one option investors may currently consider seeking is U.S. government debt. However, ten-year note yields bottomed out at 3.05 percent last week.[1] Clients are being advised that they “should think twice” about treasures, that’s because consumer inflation continues to outpace those yield figures.” [2] Treasury yields are stupidly low,” says Robert Auwaerter, head of the fixed-income group at Vanguard Group. [3]

Are there any other U.S. government options that provide reasonable rates of return? Given the national debt issues and current low Fed rate will inflation play a part? Presented below is one option that may help clients hedge against inflation.

Treasury Inflation-Protection Securities

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, clients are paid the adjusted principal or original principal, whichever is greater. This provision protects clients against deflation.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

TIPS are marketable securities whose principal is adjusted by changes in the Consumer Price Index. With inflation (a rise in the index), the principal increases. With a deflation (a drop in the index), the principal decreases.

The relationship between TIPS and the Consumer Price Index affects both the sum clients are paid when the TIPS matures and the amount of interest that a TIPS pays every six months. As stated above, TIPS pay interest at a fixed rate. Because the rate is applied to the adjusted principal, however, interest payments can vary in amount from one period to the next. Thus otherwise stated, if inflation occurs, the interest payment increases. In the event of deflation, the interest payment decreases.

But according to the returns on TIPS they may not offer investors growth relative to the security they desire. For example the TIPS due February 2041 are currently yielding only 1.774%. [4] Moreover, interest on tips is generally subject to federal tax unlike some other government issued debt.

For more in-depth discussion on treasuries, see AdvisorFX: U.S. Treasury and Government Agency Securities.

Our series continues next week with a discussion of municipal bonds, cash accounts, commodities, international investment and more.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

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[1] Reuters. “Treasuries-Gov debt prices fall on profit taking”. May 27, 2011.  http://www.reuters.com/article/2011/05/27/markets-bonds-idUSN274758020110527. Last Accessed 5/30/2011.

[2] Chris Farrell. Safe Investing in a Troubled Economy. Bloomberg Businessweek. September 25, 2008.

[3] Id.

[4] Wall Street Journal. Friday, May 27, 2011. Market Data Center- Treasury Inflation-Protected Securities. http://online.wsj.com/mdc/public/page/2_3020-tips.html.

Why is this Topic Important to Wealth Managers? Today we continue our series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation. That being said each blogticle resumes discussion from the previous day.

Warren Buffett’s mentor, “legendary investor” Benjamin Graham, once “wrote that when challenged ‘to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.’ Those are wise words for all seasons, but especially at a time like this.” [1]

Are government backed investments one way in which clients can find some safety?

Generally United States “securities are debt instruments issued by the U.S. Treasury to raise money needed to operate the federal government and to pay off maturing obligations.” [2] The “paper” is backed by the “full faith and credit of the United States government guarantees that interest and principal payments will be paid on time, and thus, these securities are considered very safe investments.” [3] But has the financial position in Washington changed the traditional view of these obligations?

Treasury bills, or T-bills, “are short-term government securities with maturities ranging from a few days to 52 weeks.” [4] The Bills are generally sold at a discount from the par value or face amount of the bill.  An example, an investor may pay $990 for a $1,000 bill.  When the bill matures, the investor is paid the full $1,000.  The discount or difference between the purchase price and the redemption price is interest.

Treasury notes, or T-notes, are “issued in terms of 2, 3, 5, 7, and 10 years, and pay interest every six months until they mature.”  [5] Further, the notes may be sold at a discount (for less than face value), at a premium (for more than face value) or for face value.  When the note matures, the investor is paid full face value, in addition to the interest payments received.

A few of the key features of T-notes include:

• The yield on a note is determined at auction.
• Notes are sold in increments of $100. The minimum purchase is $100.
• Notes are issued in electronic form.
• An Investor can hold a note until it matures or sell it before it matures. [6]

Treasury bonds are issued for terms of 30 years and pay interest every six months until maturity. When a Treasury bond matures, the investor is paid its face value.

“The price and yield of a Treasury bond are determined at auction.” [7] Like a T-note, a T-bond, may be issued at a discount, premium or face value.  T-bonds “exist in either of two formats: as paper certificates (these are older bonds) or as electronic entries in accounts.”   Today, Treasury bonds are issued exclusively in electronic form.

Total current outstanding debt issued by the Treasury in bills, notes, bonds and other evidence of indebtedness is approximately 13.8 Trillion dollars, as of the end of November 2010. [8]

Tomorrow we continue our series with additional U.S. government investments.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

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[1] Chris Farrell. Safe Investing in a Troubled Economy. Bloomberg Businessweek. September 25, 2008.

[2] AdvisorFX.  AUS Main Libraries ,  Section 22.2  Investment Vehicles, B—U.S. Treasury and Government Agency Securities. http://www.advisorfx.com/articles/f22-2_1_13_3760.aspx?action=13.  Last Accessed 11/29/2010.

[3] AdvisorFX. U.S. Treasury and Government Agency Securities.

[4] Untied States Department of the Treasury.  Treasury Direct-Treasury Bills.  http://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm.  Last Accessed 11/29/2010.

[5] Untied States Department of the Treasury.  Treasury Direct-Treasury Notes.  http://www.treasurydirect.gov/indiv/research/indepth/tnotes/res_tnote.htm.  Last Accessed 11/29/2010.

[6] Untied States Department of the Treasury.  Treasury Direct-Treasury Notes.

[7] Untied States Department of the Treasury.  Treasury Direct-Treasury Bonds.  http://www.treasurydirect.gov/indiv/products/prod_tbonds_glance.htm.  Last Accessed 11/29/2010.

[8] Damian Paletta.  The Wall Street Journal. Debt-Panel Chairmen Work to Gain Support.  November 29, 2010.  http://online.wsj.com/article/SB10001424052748703785704575643111128016590.html.  Last accessed 11/29/2010.; see also Untied States Department of the Treasury.  Treasury Direct.    http://www.treasurydirect.gov/NP/BPDLogin?application=np.  Last Accessed 11/29/2010.

Congress on both sides of the aisle is playing a game of political chicken with the debt ceiling; but what would impact mean for the markets and the economy in general?

Although the U.S. hit its $14.3 trillion debt ceiling on Monday, May 16, economic Armageddon hasn’t yet rained down on the U.S. economy. Thanks to some slick Treasury Department maneuvering, the date when the U.S. really reaches the limit has been pushed to around August 2.

But instead of breathing a sigh of relief and resolving to engage in a bipartisan effort to resolve the debt ceiling issue in advance of the August drop-dead date, both sides are likely to wait until the last moment to avoid impact—threatening our fragile economic recovery in the process.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of U.S. debt in Advisor’s Journal, see Storm Clouds over U.S. Debt (CC 11-85).

Why is this Topic Important to Wealth Managers? This blogticle is part of our casual Friday series that discusses topics relating to national, political, economic, global and other relevant issues. It is our intention to keep wealth managers well informed in areas affecting client planning.

The U.S. Department of the Treasury gladly welcomed S&Ps affirmation of its AAA rating and Moody’s view of recent fiscal announcements by both parties as a positive ‘turning point’ for the U.S. earlier this week.

The Treasury released the following statement earlier this week from Assistant Secretary for Financial Markets Mary Miller on the announcements by Standard and Poor’s and Moody’s:

“This morning, S&P affirmed the AAA rating of the U.S., but emphasized the importance of timely bipartisan cooperation and action on fiscal reform.  In addition, Moody’s commented today that ‘we view the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government.”

“As the President said last week, addressing the current fiscal situation is well within our capacity as a country.  He has initiated a bipartisan process that will allow us to make progress on a balanced approach to restoring fiscal responsibility.  The U.S. economy is strengthening as it emerges from the recent recession. Both political parties now agree that it is time to begin bringing down deficits as a share of GDP.”

“S&P assumes that the U.S. will enact ‘a comprehensive budgetary consolidation program – combined with meaningful steps toward implementation by 2013,’ but we believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.”

Standard and Poor’s had the following to say regarding the characterization to a negative outlook for the U.S. Government: “Our negative outlook signals that we believe there is a likelihood of at least one-in-three of a downward rating adjustment within two years. Although we view the U.S. sovereign’s considerable strengths to largely outweigh material risks, primarily fiscal and external, we now believe these strengths might not be able to offset fully the continued credit impact from these weaknesses, during the coming two years, at the ‘AAA’ level.”

The question is can you blame the rating service? If you are to examine the 2012 Federal Budget it shows a projection over the next 10 years of a seven trillion dollar loss. The United States must take some serious strides to rectify the situation that has gotten out of control. A balanced budget is one critical area where lawmakers should focus and resolve our deficit and debt issues.

As S&P states, “The outlook reflects the possibility of a downgrade if political negotiations over when and how to address both medium- and long-term fiscal challenges persists beyond 2013.”  The rating agency stated that, “the lack of such an agreement by 2013, or a significant  further fiscal deterioration for any reason, could lead us to lower the rating.”

Next week’s blogticles will discuss planning concepts for wealth managers in 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? This blogticle presents discussion related to the State Small Business Credit which is now being applied for by an increasing number of states. The program is intended to provide capital to small businesses. Wealth managers with small business clients in these states should be mindful of the potential access to new capital.

Late last month the U.S. Department of the Treasury announced the approval of State Small Business Credit Initiative (SSBCI) applications from Connecticut, Missouri, and Vermont. The planned use of SSBCI funds by these states is intended to help create new jobs and is expected to spur more than $534 million in additional small business lending. The SSBCI program, which supports state-level small business lending programs, is one component of the Small Business Jobs Act.

On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the “Act”).[1] The Act created the SSBCI, which was funded with $1.5 billion to strengthen state programs that support lending to small businesses and small manufacturers. In total, the SSBCI is expected to help spur up to $15 billion in lending to small businesses.

Under the SSBCI, participating states will use the federal funds for programs that leverage private lending to help finance small businesses and manufacturers that are creditworthy, but are not getting the loans they need to expand and create jobs. The SSBCI will allow states to build on successful models for state small business programs, including collateral support programs, Capital Access Programs (CAPs) and loan guarantee programs.  Existing and new state programs are eligible for support under the SSBCI.

“These critical funds will help small businesses access the capital they need to expand their operations, create new jobs, and continue supporting our nation’s economic recovery,” said Treasury Secretary Tim Geithner. “Public-private lending partnerships, such as the State Small Business Credit Initiative, have a proven track record of success, and I’m pleased that this funding is on its way to support economic growth in these states.”

Under the SSBCI, all states are offered the opportunity to apply for federal funds for state-run programs that partner with private lenders to increase the amount of credit available to small businesses. States must demonstrate a reasonable expectation that a minimum of $10 in new private lending will result from every $1 in federal funding. Accordingly, the $1.5 billion federal funding commitment for this program overall is expected to result in at least $15 billion in additional private lending nationwide.

Details on the applications approved earlier in March, which the states expect will generate a cumulative total of at least $534 million in new small business lending in Connecticut ($133 million), Missouri ($269 million), and Vermont ($132 million).

The Treasury has previously approved funding for SSBCI programs in California, Michigan, and North Carolina. Additional applications are expected to be approved in the coming weeks.

Next week’s blogticles will contain helpful tips for wealth managers.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] PL 111-240.

Why is this Topic Important to Wealth Managers? This blogticle is part of our casual Friday series. It presents wealth managers with information on the start-up expense deduction as well as general information on tax law.

Here at Advanced Markets FYI, we’ve been working in tax law as applied to wealth management for a number of years, and must say it is rare to see mistakes by the Department of the Treasury. In fact, the general practice of a tax lawyer is to read a particular Code Section and corresponding Treasury Regulations multiple times until it finally makes sense. There are however, some instances where no matter how many times you read a Code Section and/or Treasury Regulation something does not add up.

At this point you have a few options. First, maybe you re-read it because chances are the Department of the Treasury and IRS did not made a mistake. As a general matter, it is unusual to find authoritative text that contains an error. So maybe by this point you’ve now corrected your misunderstanding with another proper reading taken with the underlying premise that the Treasury does usually not foul up. If you are still not sure that what you’re reading makes sense, it may be helpful to find more information about the subject. For example finding articles, journals or papers written on the subject will generally add clarity to a particular issue. However, the specific facts and circumstances upon which you are trying to apply the Code or Regulations are commonly unique. Furthermore, not every tax subject or Code Section is written about extensively elsewhere.

Now assuming you’ve spent significant time and diligence reading the primary source and looking for secondary sources to gain a better understanding, it’s then time to break out the big guns. The way we see it is, you have two options at this point. You can find a tax expert to examine the subject in detail with your particular question in mind. It is usually helpful to ask questions and work your way through a problem with another expert who sees the world slightly different than yourself (slightly is used as a relative term in this context). However, if you still don’t have the answer you’re looking for, you can always Blog about it!

Thus, we believe we have come across an error in the Code and Regulations (frankly we think they should give an award when this happens, but we attribute non-recognition to lack of funding anyway). We therefore put it up to you to prove us wrong…

The Small Business Jobs Act of 2010 Section 2031 amends Section 195 Subsection b of Title 26 of the United States Code. The amendment to the Code allows for a $10,000 deduction for start-up expenses with a reduction in the deduction for expenses over $60,000 after Dec. 31, 2009.[1]

Further, the IRS website states (although not authoritative):

Sect. 2031: Increase in amount allowed as deduction for start-up expenditures in 2010

For taxpayers starting an active trade or business, the new law increases the amount the taxpayer is allowed to elect as a deduction for start-up expenditures under section 195(b) for taxable years beginning after December 31, 2009. Section 2031 allows up to $10,000 as a deduction for start-up expenditures, but requires a dollar-for-dollar reduction of the $10,000 deduction if startup expenditures exceed $60,000. [2]

However, the Regulations nevertheless say something else… They appear to have not been amended along with the Code Section; thus the deduction allowed under the Treasury Regulations is only $5,000 (as was the limit before enactment of Section 2031 of the Small Business Jobs Act). Take a look for yourself. What is really interesting (at least to some tax professionals) is that Treasury Regulation Section 1.195 has been reversed and in its place one may be directed to Section 1.195-T or Temporary. Since the Temporary Regulation Section expires during 2011, perhaps it was not amended on purpose? All the same, the guidance is not in accordance with the Code. However, it is not likely that any court would determine the mismatch of information as anything other than an administrative oversight and most courts would likely follow the amended Code section’s limits as passed by Congress.

Next week’s blogticles will present new wealth management ideas for the Second Quarter 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] See The Small Business Jobs Act of 2010. PL 111–240, Sept. 27, 2010. Section 2031(a); 26 U.S.C. 195(b).

[2] See Internal Revenue Service. “Small Business Jobs Act of 2010 Tax Provisions”. http://www.irs.gov/businesses/small/article/0,,id=230307,00.html. Page Last Reviewed or Updated: February 16, 2011. Last Accessed 3/22/2011.