John Wasik

NEW YORK (Reuters) – Peter Orszag, former budget director for the Obama Administration and now vice chairman of global banking for Citigroup, sees a “trifecta” of mega financial woes coming toward the end of the year that are unlikely to be tackled by Congress before election day.

Speaking at the Executives’ Club of Chicago on Wednesday, Orszag said he sees this moment as a collision between dysfunctional national politics and the ongoing economic malaise. It is “a rare moment in economic history — a tectonic plate shift,” he says.

I prefer to call what he identifies as the trifecta as a triple-strength witch’s brew: The expiration of Bush-era income and estate-tax cuts and $1.2 trillion in automatic budget cuts triggered by the debt-limit compromise passed last year.

If the Bush-era tax cuts expire — a move endorsed by the proposed White House 2013 budget proposal — then millions may find themselves in higher tax brackets. Estate taxes would also revert from a $5 million exemption and 35-percent rate to 55 percent with a $1 million exemption.

There’s more bad news if Congress remains at loggerheads: The $1.2 trillion in triggered cuts would impact everyone from the Pentagon to Medicare recipients, although specific program parings haven’t been identified. It may put the brakes on a U.S. economy still lumbering along in recovery mode.

Orszag estimates that the budget cuts and tax increases could clip up to 4 percent from gross domestic product. By my back-of-the-napkin math, that potentially triggers another recession.

What will Congress do to avoid this caldron?

Orszag, who once had a seat among the inner circle of White House policy planners, says Congress may choose the “fall over the cliff” strategy and not do anything during the lame-duck period between election day and when the new Congress is seated in 2013.

Despite the recent compromise reached in extending the payroll-tax cut and jobless benefits, Congress is expected to do little else of substance for most of the year.

Orszag says congressional action is stymied by “hyperpolarization” — where there is political center in which to forge compromises on major tax, social program and spending issues. In the interim, Americans are left wondering how to plan for their financial future, a mass uncertainty that is contributing to the dismal poll ratings for Congress these days.

As you prepare your 2011 taxes, it’s an excellent time to talk to your advisers to see what you can do to avoid huge surprises 10 months from now. Here are four ways to prepare:

* Talk to your financial, tax and estate planners about several scenarios. What will you need to do if the tax cuts expire? Will you need to start rounding up more deductions for 2013? What about your estate plan? There are a number of strategies involving trusts, gifting and life insurance that can reduce its taxable value.

* Review your European exposure. Orszag’s biggest concern about the European sovereign debt crisis is a “contagion” to U.S. stocks. Are you exposed to some of the largest lenders to the most imperiled countries like Greece, Italy, Portugal, Ireland and Spain? If so, how can you reduce your stake in these countries?

* Where’s your volatility insurance? Every portfolio needs it these days. You can hedge large stock-market risks with bonds, inverse exchange-traded funds or put options. Work with a fiduciary adviser to run a fine-tooth comb through your portfolio.

* Keep on saving. If Medicare or Social Security cuts surface, you can be prepared for them by boosting contributions to your retirement accounts or other savings. Enroll in automatic savings plans through your employer, if you haven’t done so.

At the very least, educate yourself about worst-case scenarios and decide what you need to do. An investment policy statement outlining goals, risk and portfolio allocation is a good start. That way, when Washington’s toil and trouble starts bubbling again, you’ll be prepared.

(Editing by Beth Pinkser Gladstone and Andrea Evans)

NEW YORK, Feb 17 (Reuters) – Peter Orszag, former
budget director for the Obama Administration and now vice
chairman of global banking for Citigroup, sees a “trifecta” of
mega financial woes coming toward the end of the year that are
unlikely to be tackled by Congress before election day.

Speaking at the Executives’ Club of Chicago on Wednesday,
Orszag said he sees this moment as a collision between
dysfunctional national politics and the ongoing economic
malaise. It is “a rare moment in economic history — a tectonic
plate shift,” he says.

I prefer to call what he identifies as the trifecta as a
triple-strength witch’s brew: The expiration of Bush-era income
and estate-tax cuts and $1.2 trillion in automatic budget cuts
triggered by the debt-limit compromise passed last year.

If the Bush-era tax cuts expire — a move endorsed by the
proposed White House 2013 budget proposal — then millions may
find themselves in higher tax brackets. Estate taxes would also
revert from a $5 million exemption and 35-percent rate to 55
percent with a $1 million exemption.

There’s more bad news if Congress remains at loggerheads:
The $1.2 trillion in triggered cuts would impact everyone from
the Pentagon to Medicare recipients, although specific program
parings haven’t been identified. It may put the brakes on a U.S.
economy still lumbering along in recovery mode.

Orszag estimates that the budget cuts and tax increases
could clip up to 4 percent from gross domestic product. By my
back-of-the-napkin math, that potentially triggers another
recession.

What will Congress do to avoid this caldron?

Orszag, who once had a seat among the inner circle of White
House policy planners, says Congress may choose the “fall over
the cliff” strategy and not do anything during the lame-duck
period between election day and when the new Congress is seated
in 2013.

Despite the recent compromise reached in extending the
payroll-tax cut and jobless benefits, Congress is expected to do
little else of substance for most of the year.

Orszag says congressional action is stymied by
“hyperpolarization” — where there is political center in which
to forge compromises on major tax, social program and spending
issues. In the interim, Americans are left wondering how to plan
for their financial future, a mass uncertainty that is
contributing to the dismal poll ratings for Congress these days.

As you prepare your 2011 taxes, it’s an excellent time to
talk to your advisers to see what you can do to avoid huge
surprises 10 months from now. Here are four ways to prepare:

* Talk to your financial, tax and estate planners about
several scenarios. What will you need to do if the tax cuts
expire? Will you need to start rounding up more deductions for
2013? What about your estate plan? There are a number of
strategies involving trusts, gifting and life insurance that can
reduce its taxable value.

* Review your European exposure. Orszag’s biggest concern
about the European sovereign debt crisis is a “contagion” to
U.S. stocks. Are you exposed to some of the largest lenders to
the most imperiled countries like Greece, Italy, Portugal,
Ireland and Spain? If so, how can you reduce your stake in these
countries?

* Where’s your volatility insurance? Every portfolio needs
it these days. You can hedge large stock-market risks with
bonds, inverse exchange-traded funds or put options. Work with a
fiduciary adviser to run a fine-tooth comb through your
portfolio.

* Keep on saving. If Medicare or Social Security cuts
surface, you can be prepared for them by boosting contributions
to your retirement accounts or other savings. Enroll in
automatic savings plans through your employer, if you haven’t
done so.

At the very least, educate yourself about worst-case
scenarios and decide what you need to do. An investment policy
statement outlining goals, risk and portfolio allocation is a
good start. That way, when Washington’s toil and trouble starts
bubbling again, you’ll be prepared.

By John Wasik

(Reuters) – Why should you pay to spend your own money? The newest generation of prepaid debit cards, which banks keep offering despite the growing chorus of advice to the unbanked against buying into them, often levy more fees than conventional credit cards. The latest indignities even include charges for adding money to your account.

There are myriad reasons people choose a prepaid debit card,

but they are all predicated on the hypothetical equation that the cards will save them money over traditional checking accounts with potential overdraft fees. Yet, with these cards, you don’t build a credit history to increase your credit score; you don’t avoid fees; and, you don’t structure your finances so that you spend more wisely.

The only real beneficiaries of these cards are the institutions that issue them, because the fees add up with the same regularity as with bank accounts, and sometimes amount to more charges for the users than there would be with a traditional checking account.

Take the new Mango card, for example. While it gives you a paltry $20 one-time bonus for enrolling in direct deposit — far less than what the issuing bank will save over time — it charges you $2 per ATM withdrawal, $4.95 to deposit cash through a third party (direct deposit is free) and 50 cents for each balance inquiry.

To its credit, the Mango card is linked to your savings account and will reimburse the $5 monthly fee if you add at least $500 a month, which is a virtual wash when you consider the reload fee. And there’s a big catch on the promised 6 percent yield on the savings feature: It’s only for balances less than $5,000 and it’s a teaser rate, so it won’t last long. Have more than $5,000 on deposit? Then the rate is 0.10 percent.

Unlike the new fee-laden Approved Card, which has TV personality Suze Orman as a promoter and investor (link.reuters.com/jex56s),

the Mango card is being endorsed — but not co-branded by — comedian George Lopez. While Lopez may be a funny guy, the card and its fees are no laughing matter if you’re serious about saving money.

Celebrity cards are rarely a good deal. In most cases, you’ll pay more, so instead of running toward celebrities’ financial products, we should be bolting away from them. Which brings to mind Russell Simmons’s pre-paid Rush Card, also marketed under “Baby Phat,” which advertises no “hidden fees.”

The music mogul has promoted the card as a way to empower the black community with access to banking services. While the card doesn’t hide its fees — they are listed in the cardholder agreement (link.reuters.com/sex56s) — they certainly add up and don’t encourage net savings. The company will impose surcharges up to $14.95 just based on the design or logo on the card. You are allowed two free withdrawals per month, but after that the cost is $2.50 per transaction. There’s no charge to add money, but if you need to replace your card or get express cash, it’s $30 for each service. The basic plan costs $9.95 a month.

The obvious drawback to consumers of paying multiple fees for access to their money on these products came to the attention of the Florida Attorney General’s office, which last year was investigating the claims of the Rushcard and other prepaid card companies. Perhaps more state attorneys general should start looking into bank practices on these prepaid cards to see if there is any predatory marketing going on; and work on regulating the message banks are sending. Maybe a consumer campaign on Twitter would be enough to put a stop to them.

Simmons, for his part, responded to the Florida probe by defending his product, saying: “third party research has shown that for many customers, the best prepaid card services offer significant savings compared to what they would pay in traditional bank checking accounts, with savings of up to 50 percent.” (link.reuters.com/kex56s)

If there were no free checking accounts or debit cards available, that might be true. But we recently listed 10 options (link.reuters.com/wep95s), and you can go to a site like bankrate.com (link.reuters.com/mex56s) and find plenty more. Some 76 percent of credit unions (link.reuters.com/nex56s) offer free non-interest bearing checking accounts. You can still get socked with overdraft fees, though, so you have to be careful how you use them. You can also do a detailed calculation comparing bank fees and prepaid debit cards fees at the credit card-comparison site nerdwallet.com (link.reuters.com/pex56s).

Want to stick with banks? Then check out online banks. More than half of them offer free checking accounts with no maintenance fees, according to Moneyrates.com (link.reuters.com/qex56s),

which notes that “free checking is making a comeback.”

If you really want to endorse what a celebrity is doing, just watch their shows or buy their books or music. Stay away from their financial services offerings. They are not only banking on their fame, they are overcharging you to subsidize their celebrity.

(Editing by Beth Pinsker Gladstone and Andrea Evans)

NEW YORK (Reuters) – In the wake of the just-announced landmark $25 billion settlement over dodgy mortgage practices, is it time to buy a home?

While it’s laudable that those facing foreclosure may gain the ability to refinance or write down principal, there are still a host of unanswered questions about the U.S. housing market — which may not improve much at all in the short term.

Home buyers want security — the reassurance that their real estate investment will at least act like inflation-adjusted bonds and track the increase in the cost of living. During the bubble years, though, many mistakenly believed they were buying into the equivalent of bullet-proof stocks, paying both dividends and capital appreciation. Housing is neither.

A home is more like a derivative — that is, a vehicle based on a host of complex variables. Notice I didn’t call it a sure-fire investment.

It’s volatile commodity, but there’s a way to predict how it might perform — if you’re willing to be diligent.

You’ll have to be more selective than ever and look at a broad range of local and national indicators before making a decision. Bear in mind that local information is more important than national statistics. Some markets may be stabilizing while others are still depreciating. The more information you cull, the better off you’ll be down the road.

In the latest S&P Case-Shiller home price survey, for instance, nearly all of 20 major markets surveyed showed declines. (here). Only the Washington, D.C. and Detroit areas showed modest gains.

Here’s how you can construct your own housing-health gauge:

* Employment and Economy are two main drivers: What is local employment like in the area? Where job creation is strong, housing demand often thrives. Are local businesses hiring or firing?

* Supply & Demand: Is your area overbuilt? Are there a large number of unsold or foreclosed homes on the market? Huge housing inventories put downward pressure on prices; information is available from your local National Association of Realtors affiliate.

* Demographics. Baby Boomers are starting to retire and downsize. Their parents may have already moved out of once-stable neighborhoods. Are young families, who can drive prices higher, coming in to replace them in the areas you’re considering?

* Cost of Financing: Mortgage rates are still at generational lows. Under normal conditions, buyers would be purchasing en masse. But high inventories, foreclosures and unemployment are curbing the market.

* Mortgage Qualifications: Many homeowners may not qualify for the lowest rates, due to restrictive lending standards that were enforced after the bubble burst. High credit scores are essential. Leverage is what you borrow and equity is your stake in the property and what you put down. Having more equity is better in terms of getting the best rates. Keep in mind that the amount of leverage you use will magnify or diminish your loss or profit if you have to sell.

* Relative scarcity of land. In coastal areas, building is restricted, often keeping prices for the best properties high. This is not a problem in the Midwest and South, where there is still plenty of land for building.

Weighing all of these factors can aid your decision. You also need to consider one more factor: Market psychology. While this is notoriously difficult to measure, you need to know if potential buyers are seriously looking at homes and signing contracts.

I like to monitor the National Association of Realtors’ “Pending Home Sales Index,” which is designed to be a leading indicator of homes sales. It fell in December, after hitting a 19-month high the previous month. (here)

The most troubled markets generally have the highest inventories of unsold homes combined with flagging economic conditions. Atlanta, Cleveland, Detroit and Las Vegas all have average home prices below their 2000 levels, S&P reported. Atlanta led the pack of losing markets with a negative 11.8 percent return in the latest survey.

Like most derivatives, the only thing guaranteed with real estate is what it’s not: a not a blue-chip stock with a steady dividend. No matter how the terrain shifts, the risk never seems to go away.

(Editing by Beth Pinsker Gladstone and Andrea Evans)

By John Wasik

(Reuters) – In theory, last year should have been a great time to be invested in a hedge fund. With markets gobsmacked by U.S. and euro zone crises, what better way to protect your money than to hedge against the market — the nominal premise behind a hedge fund? Managers can be defensive and pick the sectors or countries that will do well when most of the market is sour. There’s a big catch here: Success depends upon whether managers guess which sector won’t decline or manage to retreat to bonds at the right time.

And hedge funds definitely got caught in the net in 2011.

Most hedgies guessed wrong last year or stayed their own doomed course. Like most actively managed investments, hedge funds fell victim to the myth that you can predict — and avoid — market gyrations on a regular basis. Except for fixed-income funds, every other category of hedge funds lost money in 2011, and all told, the sector lost about 5 percent. Depending upon which hedge fund strategy you bought into, you could’ve done even worse. Some 75 percent of funds in emerging markets lost money. India and emerging Europe were among the worst categories. Only Brazil was a winner among the developing countries.

Meanwhile, the passive S&P 500 Industrial Index gained about 2 percent on a total return basis, according to the HFN Hedge Fund Aggregate Index. You also would’ve been better off holding a portfolio of plain-Jane U.S. Treasury bonds.

MASSIVE FEES

Like consistently winning the Super Bowl, it’s difficult for a hedge fund manager to beat the market. Because of their fees, they’re always starting behind the eight ball. Hedge funds charge up to 20 percent for performance (as a percentage of profits), and up to 2 percent for management — dwarfing the management fees of passive stock-index funds, which charge as little as 0.07 percent for total annual management.

In a new book entitled “The Hedge Fund Mirage,” author Simon Lack said real investor profits were a negative $308 billion from 1998 to 2010. In 2008, when hedge funds should have been protecting investors’ funds, they consumed nearly all of the profits earned in previous years.

Ronnie Shah, a research associate with Dimensional Fund Advisors (DFA), a low-cost money manager, found that fees usually get in the way of producing superior returns once you subtract all fund expenses — which is essential math for every investor.

“The arithmetic of active management predicts that, in aggregate, active managers will underperform the market by the fees they charge,” Shah wrote in an unpublished DFA paper available to clients. The paper studied portfolio returns from 1927 through 2010.

Of course, this is nothing new to index-fund investors, who have been heeding the mantra of Vanguard Group founder Jack Bogle for decades.

Bogle keeps it simple for every investor. “Costs matter,” is his cri de coeur. The man should win a Nobel Prize in economics not only for his good sense and durable mathematical truths, but for inventing the index fund, which has saved and made investors billions over the decades.

Not only do costs matter, but manager risk, transparency and liquidity are still massive stumbling blocks in hedge funds. Managers are constantly guessing which sector is going to be profitable, but are slow to disclose what they hold and lock up investors’ money.

Many of these risks are unnecessary. If hedge fund and other active money managers were to adhere to a fiduciary standard and put their clients’ interests first, not only would their exorbitant fees plummet, they might well adopt more passive approaches — in which case they couldn’t remotely justify those incredible expenses.

The SEC is working on a fiduciary proposal for brokers, but is chafing under pressure from the financial services industry. Brokers and non-fiduciary advisers are pulling out all stops to kill this new rule, which was mandated by the Dodd-Frank financial reform law. So it’s not known exactly when we’ll see the rule or if whether it will be diluted (link.reuters.com/sav46s).

As for the $2 trillion hedge fund industry, if you want to spend money on the cachet of having a manager throwing darts — knowing most of them are unlikely to beat the market — be my guest.

Just be aware that the “hedging” part of their names is often a money-losing misnomer. Maybe they’re just referring to the Versailles-like shrubbery in front of their exquisitely landscaped offices. Guess who’s paying for it?

(Editing by Beth Pinsker Gladstone and Andrea Evans)

NEW YORK (Reuters) – Last year, the dividend-growth strategy was a speedboat navigating the doldrums of the stock market.

While plenty of investments sagged from the European and U.S. debt crises, a portfolio mostly in healthy companies paying solid dividends beat practically all comers. Although the Standard & Poor’s 500 stock index was flat in price return last year, dividend-oriented funds like the Vanguard Dividend Growth Strategy gained 9.43 percent.

Dividends are usually a good bulwark against most market storms, especially for income-oriented investors. Yet the overall strategy may not do as well in 2012.

“There’s a real possibility that dividend stocks could trail this year, but long term, dividends have accounted for nearly half of the S&P 500 investors’ total return,” according to Jack Ablin, chief investment officer of Harris Private Bank.

Last year, dividends accounted for all 2 percent of the S&P 500 index’s total return. This year, if the economy perks up, we may see capital appreciation dominate the big-stock index, or not, depending on whether euro zone angst gushes into North America and Asia.

You also have to consider which stocks paid the healthiest dividends last year. They were bunched up in cash-rich companies that typically hold up during a slowdown, such as utilities. If you’re looking to those sectors again for the same returns as in 2011, you could be disappointed.

Will this year reprise the safe-haven stampede?

Institutional investors frequently engage in “sector rotation,” favoring entirely different industries than they did the previous year. Will this year’s winners be in consumer staples, industrial, manufacturing or technology? In a growth environment, they may pull ahead as the economy expands.

In any scenario, you wouldn’t want to be over-concentrated in one sector. Also keep in mind that a big dividend may be a sign of trouble.

Sure, you may be able to find a company like Frontier Communications Corp paying a 17 percent yield, but that doesn’t mean the company’s stock price is headed up.

The opposite may be true and the market may be relaying bad news. Remember yield is a ratio of dividend to the share price. When the price drops, the yield often rises. Frontier’s share price has fallen by about one-half from its 52-week high in February 2011.

Granted, there’s no harm in assembling a portfolio of steady companies that raise their dividends on a regular basis. Just make sure you have a diversified portfolio that doesn’t place bets in a handful of industries. Several mutual funds and exchange-traded funds can do this work for you.

The SPDR S&P Dividend ETF, for example, picks the 60 highest yielding stocks that have boosted their dividends every year for the past quarter-century. The largest holding in the ETFs accounts for about 4 percent of the underlying index that the managers track, so it is well diversified.

For more of an international focus, consider the iShares Dow Jones Select Dividend Index, which tracks 100 of the highest dividend payers in the Dow Jones Developed Markets ex-U.S. Index. The trade-off here is more European exposure, but the yield is 5 percent and may provide some insulation against a sagging U.S. economy.

If you subscribe to the global slowdown theory this year, dividend-rich companies offer some insulation. Yet they are not magic bullets to protect you from price drops in your favorite stocks.

You’ll still need to look to bonds and adjust your portfolio accordingly if deflation is still a problem.

The euro zone will continue to suffer, particularly when it comes to the most ailing countries, including Greece, Portugal and Ireland, and their principal lenders in Northern Europe.

here

(Editing By Lauren Young and Jeffrey Benkoe)

By John Wasik

(Reuters) – If the president and Congress are serious about income equality and cutting huge breaks for the wealthy, they should raise the capital gains rate.

While the president didn’t mention it by name in his State of the Union speech on January 24, it’s one of the many gorillas in the tax reform room.

There’s no question that the 15 percent rate on capital gains and dividends largely favors super-wealthy taxpayers over wage earners. Just look at Mitt Romney’s tax return. As former Labor Secretary and economist Robert Reich once noted: “It’s a loophole large enough for the super-rich to drive their Ferraris through. About 80 percent of the income of America’s richest 400 comes in the form of capital gains.” (link.reuters.com/gen36s)

According to economist Jared Bernstein, who analyzed Congressional Research Service figures, capital gains and dividends were “the largest single contributor to the growth of inequality from 1996-2006.” (link.reuters.com/hen36s)

Why should those who primarily make money from private equity, financial, business and real estate appreciation and dividends pay more than 50 percent less than wage workers who are subject to the top rate in federal, state, Medicare and Social Security taxes?

If you’re from the supply-side camp, it’s because the lower rate may encourage wealthy taxpayers to invest in capital, business and job formation while raising more tax revenues. More fundamentally, at least according to the conservative group Americans for Tax Reform, “when you tax something more, you get less of it.”

When taxpayers know that the capital gains rate is going up, the “fire sale” effect comes into play: They sell assets to get taxed at the lower rate before the higher levy kicks in, hence the higher cash flow to the Treasury before the lower tax expires.

But there’s no consistent evidence that shows that a lower capital gains rate does much for the economy long term. The rate of new business formations actually climbed from 1983-1987, when the maximum capital gains rate was 20 percent, according to the Kauffman Foundation, a think tank that specializes in entrepreneurism. (link.reuters.com/jen36s)

When the gains rate hit a maximum 29 percent from the middle of 1993 into 1997, there was another spurt of new business growth. Since 2006, though, small-business creation has generally fallen – even with the lower capital gains rate. The recession and housing meltdown are the likely malefactors.

Of course, recessions or periods of double-digit interest rates – which hurt small businesses the hardest – are the worst times for small-firm growth anyway, so the capital gains rate would not necessarily have been a primary hindrance during times like 1979 through 1983.

When do capital gains proceeds fill up the national Treasury the most? The data is inconclusive. In 1988, realized gains as a percentage of gross domestic product were more than 7 percent – the highest amount in almost a quarter century, and that was when gains rate was 20 percent.

Tax rates are often like porridge. Sometimes they may be too high; at other times just right. It could be that 20 percent is a sweet spot for gains. In contrast, the lowest capital gains/GDP percentage was 1.57 percent in 1977, when the maximum rate was nearly 40 percent.

What can barely be debated is that the capital gains rate is one of the multi-millionaire’s best fiscal friends. Those who made $10 million or more, according to IRS statistics from 2009, reaped a total of nearly $70 billion in long-term capital gains. That’s 10 times the amount of gains taken by those making from $75,000 to $100,000.

While cutting the capital gains rate generates more revenue overall due to the fire-sale effect, it’s not in the best interest of the country to keep it at 15 percent. Raising it would also reduce the burgeoning federal deficit. If it’s not an efficient way of creating jobs or businesses, why keep it so low?

“Arguments that the capital gains rate affects economic growth are even more tenuous,” says the non-partisan Tax Policy Center. The group saw no correlation between rates and GDP growth “during the last 50 years.”

Of course, the gains rate is but one item among thousands of special breaks in the tax code. You have to put everything on the table, from mortgage deductions to offshore corporate income if you want to ferret out wasteful tax handouts, which is highly unlikely in this election year.

Yet if one believed that Congress was earnestly tackling deficit reform in the interest of fairness and fiscal sanity – or did nothing this year – I would tell my tax preparer to take every possible break in 2012. That’s because the special rate on capital gains will expire after December 31 – a deadline that will seem pretty urgent right around election time in November.

(The writer is a Reuters columnist. The opinions expressed are his own.)

(Editing by Beth Pinsker Gladstone and Dan Grebler)

By John Wasik

(Reuters) – While Americans might get a little break in their payroll taxes through the end of this year, greater financial relief for workers will be elusive. After the State of the Union speech by President Obama on Tuesday night, it’s clear that the wizard will still be hiding behind the curtain.

The best evidence of this was when President Obama invoked the progressive intent of the proposed Buffett rule to tax millionaires at a minimum 30 percent rate marginal rate – about twice the effective rate that Mitt Romney, the GOP presidential candidate, has paid in recent years.

It was obvious from the antarctic glare of House Majority leader Eric Cantor and the twitchiness of Speaker John Boehner that President Obama had a better chance of launching a mission to Mars in this caustic election year than gaining any ground on progressive tax reforms.

It’s not that President Obama didn’t hit grace notes for bolstering his platform. Next to job creation, income inequality and tax fairness were near the top of his agenda.

“We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by,” Obama said. “Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.”

Despite his bully pulpitting, the most likely outcome for the next year is that most of the president’s proposals mentioned in the State of the Union speech will be benched in the Congressional bullpen. Since House leaders wouldn’t even touch his jobs bill last year – which offered some minor paring of write-offs for the ultra-wealthy – populist tax reforms will likely be shelved until 2013 and beyond.

A do-nothing Congress will actually have a great impact. Unless both houses act by the end of the year, all of the Bush-era tax cuts and interim lower rates on estate taxes will automatically expire. Here’s what might happen if Congress is deadlocked:

* On January 1, 2013, the top marginal federal income tax rate will rise more than 13 percent – from 35 percent to 39.6 percent.

* The top tax rate on long-term capital gains will go from 15 percent to 20 percent – a 33 percent increase.

* The maximum tax rate on dividend income, now capped at 15 percent, will rise to 39.6 percent – a 164 percent hike. That means dividends will be taxed like ordinary income.

* The marriage penalty would return in 2013. The standard deduction for married taxpayers would no longer be calculated as 200 percent of the amount for unmarried filers; it would return to about 167 percent of the unmarried rate.

* The estate-tax exemption is scheduled to fall from $5 million back to $1 million, while the maximum estate-tax rate is scheduled to rise to 55 percent.

Depending on your point of view, a congressional logjam would either be a restoration of the tax code’s progressiveness and a partial antidote to the government’s budget deficit problems – or the mother of all tax increases. Neither the president nor his opponents have addressed this outcome in public.

For college students and parents, there was a hint of relief if Congress can extend or expand a tuition tax credit and link federal research dollar allocations to curbing tuition increases. And “doubling the number of work-study jobs in the next five years” wouldn’t hurt either, as the president proposed, although it’s small beer compared to the current crippling cost of college, which no politician seems to be able to remedy.

One intriguing idea, offered without any details, was a plan to allow homeowners to refinance at low rates. “I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates,” Obama said with no elaboration.

Does this mean loosening the standards by which mortgage giants Freddie Mac and Fannie Mae buy loans? By “responsible homeowners,” did he mean those who don’t qualify for mortgages because their credit scores are not high enough or the one in five distressed homeowners whose mortgage balances now exceed the value of their homes?

Since the Freddie and Fannie are wards of the state due to their 2008 takeover by the government, this might be doable. Or the administration could expand its homeowner aid and foreclosure prevention programs, which have been huge disappointments in stopping mortgage defaults.

No matter which scenario you buy, you’ll need to have a solid conversation with your tax planner well in advance of the election. The yellow-brick road that leads to the November plebiscite is full of perils.

(Editing by Beth Pinsker Gladstone)

By John Wasik

(Reuters) – I’ve never thought that laziness could be a virtue, but when it comes to investing, it’s often advantageous. You can trade too much and become too pre-occupied with the headlines and business TV shows. It can drive you crazy and you’ll lose lots of money making bad decisions.

Or you can set up a lazy Nano portfolio, which I proposed years ago – and forget about it. Based on my initial plan at MyPlanIQ (link.reuters.com/qus26s), a web-based application to help manage retirement accounts, my hypothetical Nano portfolio returned 7.4 percent in their tactical asset allocation model in 2011.

In contrast, the S&P 500 posted a tiny loss for the year.

I paid so little attention to my Nano last year that I only knew what it returned when MyPlanIQ sent me its independent year-end tally last week. I have no relationship with the site, nor did I ever ask them to monitor the portfolio. They calculated the returns and tweaked the allocations using their own tactical asset algorithm to get better results with fewer funds. While I hold some of the funds in my family’s portfolio, I don’t manage other people’s money. I’m skittish enough managing my own.

I called it Nano because it’s small in composition – only five exchange-traded/mutual funds – and modest in its aspirations. It was my humble contribution to the world of investing – a free exercise in benign neglect and diversification.

Here’s how lazy I am: I don’t try to predict the market, world events, Federal Reserve movements or the next hot sector. In fact, I make no predictions at all – including how my portfolio will perform this year. I have no special skill. My Nano set-up is a middle-of-the road core growth portfolio for someone in their accumulation phase with at least 15 years to go until retirement.

Here’s what’s in it:

* 20 percent Vanguard Total Stock Market ETF

* 20 percent Total International Stock Index Fund

* 20 percent Vanguard REIT ETF

* 20 percent iShares Barclays TIPS Bond

* 20 percent iShares Barclays Aggregate Bond

IT’S ALL IN THE ASSET ALLOCATION

As you can see, I cover five different asset classes for various reasons. I want to cover most stocks across the globe and some commercial real estate companies. On the bond side, I like the Treasury Inflation-Protected Securities fund and the iShares broad-based U.S. bond fund.

Ideally, not all of these funds will move in the same direction, and up to 60 percent of the holdings are not directly correlated with common stocks. If inflation ticks up, I have some protection in the TIPS fund. All are among the lowest-cost passive funds in their class.

But don’t take my portfolio, or any mix of funds for that matter, as a cookie-cutter template that you don’t adjust. You can customize any portfolio to fit your age and risk tolerance. Those just starting out in a career can amp up the stock portion. If you’re over 50, consider putting more than half of your money into the iShares funds.

Of course, my portfolio is not without risk.

If a major downturn clobbers Europe or the United States, it will be hurting. While I recommend my Nano portfolio to nearly anyone interested in growth, it’s not suitable for everyone.

If you’re close to retirement, you should have at least 60 percent in bonds and TIPS. Right now, my personal mix is roughly 50 percent income investments and the rest in stocks, REITs and the PIMCO Commodity Real Return Strategy fund, a combination of commodities contracts and TIPS – my inflation hedge.

If you’re extremely risk averse, you should consider the ultra-conservative Permanent Portfolio(link.reuters.com/sus26s),

which posted an 8.3 percent return last year, according to MyPlanIQ. It holds 25 percent in gold, silver and Swiss Francs and the remainder in Treasury securities (35 percent) and growth stocks.

In any case, the allocation is the key, not what you or I think the market will do this year. Focus on what you need to do and set your plan in place like a heavy piece of furniture you don’t plan to move for a while – like that La-Z-Boy recliner.

(The author is a Reuters columnist. The opinions expressed are

his own.)

(Editing by Beth Pinsker Gladstone and Jan Paschal)

By John Wasik

(Reuters) – You’re underwater on your mortgage and falling behind on payments. You may lose your home. Can you negotiate with your lender to reduce your principal?

Increasingly, the answer is yes, although still only in rare cases.

In what could become a national policy to stem foreclosures, principal reduction is a strategy you should pursue if your lender is open to the idea. It could also give a boost to the U.S. home market, which saw a spurt in existing home sales in December. (link.reuters.com/xap26s)

The potential number of homeowners who could be helped by this strategy is huge: About one in five mortgages are currently underwater, representing about $700 billion in negative equity, the Federal Reserve estimates. Many of those homeowners go into “strategic default” and foreclosure because it makes little or no economic sense to pay on a mortgage that’s worth more than their home. Up to 1 million of these homeowners may be allowed to do principal writedowns if state attorneys general reach a settlement with banks over questionable foreclosure practices, said Shaun Donovan, U.S. Housing and Urban Development secretary. (link.reuters.com/vun26s)

The idea of principal reduction to save homeowners from foreclosure is rapidly gaining traction across the country. Bank of America has entered into a pilot program with the Boston non-profit Boston Community Capital to reduce the amount borrowers owe. Trial programs are also under way in Arizona, California and Nevada.

Even the Federal Reserve is endorsing the idea.(link.reuters.com/fak85s)

A CUSHION AND COMMON SENSE

When some $7 trillion in household wealth evaporated in the housing bust, the general economy went down with it – and will stay depressed until Americans have more of a home ownership cushion.

Writedowns, which are common in corporate accounting, could buoy communities and the larger economy. Homeowners who have lost their homes in foreclosures or are saddled with negative equity are spending less in their communities on products and services. They don’t remodel, buy furniture or appliances. They have no economic incentive to invest in anything connected with their house.

The policies in place now don’t seem to be doing enough. As home values have plummeted – more than 50 percent in some of the most bubble-impacted states – homeowners have lost the ability to refinance because their equity stakes fell “underwater” as their mortgage balances exceeded the value of their homes so they no longer met lending standards. Job loss exacerbated the problem.

The federal government stepped in with a number of loan-modification programs to ease the crunch of foreclosures after the market crashed in 2008. But those programs have largely focused on cutting mortgage rates, which was little help to homeowners, who still largely defaulted on their loans.

One of the largest programs, which goes by the acronym HAMP, offered lower interest rates to 98 percent of its participants, according to a recent Federal Reserve report to the House Financial Services Committee. Yet only 32,000 of those loans were modified with principal reduction – out of some 12 million that are underwater.

“Principal reduction may reduce the incidence of default both by improving a household’s financial position, and thus increasing its resilience to economic shocks,” the Fed report stated (link.reuters.com/fak85s).

Under the current HAMP program, those underwater homeowners whose mortgage payments exceed 31 percent of gross monthly income and got their loans before January 1, 2009, may qualify for a principal reduction. The one huge catch is that loans owned by Freddie Mac or Fannie Mae, which own about half of U.S. loans, don’t qualify.

Unless HAMP or similar programs with Fannie or Freddie are enhanced to promote more principal reductions, you’re on your own with your lender. You’ll have to ask them directly if they will write down the balance on your mortgage. In most cases, the answer will probably be no, although if more people press their lenders, it may become a more popular option.

Nevertheless, while most bankers would rather send you packing than reduce a loan balance, it may be in their best interest. Foreclosure is costly and they are not in the real estate business. With housing prices expected to be flat this year and foreclosures still climbing, it could be a saving grace for an economy that’s still largely house poor.

(Editing by Beth Pinsker Gladstone and Jan Paschal)