This week's turmoil on Wall Street is raising concerns about the safety of investments, the health of retirement plans and the long-term impact on small investors. Tony Plath, a finance professor at UNC Charlotte, answered questions from Observer readers. Go to CharlotteObserver.com to submit yours. Comments have been edited for brevity and clarity. Jefferson George
Q: What happens to my investments if my investment banking firm files for bankruptcy or gets bought out by another company?
Client assets in a brokerage account are protected by the Securities Investor Protection Corp., which is similar to the FDIC's protection covering bank deposits. The SIPC, however, is a private corporation, not a division of the U.S. Treasury, like the FDIC.
With a brokerage bankruptcy, customers receive all non-negotiable securities that are already registered in their names or in the process of being registered. Funds from the SIPC's reserve are used to satisfy remaining claims after the pro rata distribution up to a maximum limit of $500,000 on the securities side of your brokerage account and $100,000 on the cash side of the account.
Q: Like many older retirees, my mother's retirement accounts are taking a serious hit. At age 77 she likely won't see them rebound to make up these losses. Why can't the government suspend the penalties and spread out the taxes for early withdrawals?
At 77, the withdrawal restrictions associated with conventional tax-deferred retirement accounts like IRAs ended long ago, at age 591/2.
There are various ways to move money from withdrawal-protected accounts to other more liquid – and lower-yielding accounts – including borrowing against the balance in the account to provide a higher current income stream. This activity has tax consequences, so schedule an appointment with your investment advisor to examine different ways to accomplish your goals.
Q: Are the current economic conditions partly due to the transition of manufacturing jobs – and the cash flow associated with those companies and employees – to other countries? If the cash is offshore, how does the U.S. economy get it back?
It's unlikely the U.S. will ever have a competitive advantage in low-skill, production-type manufacturing again. Our labor costs are too high relative to other developing areas of the world like India and China.
So how do we attract investment dollars and new jobs? The answer is simple to say, but it's difficult to do: innovation. When we perform a service or create a product here that's better than what buyers can acquire in a different part of the world, they'll come here to make the purchase.
We need well-educated, intelligent and creative people who are constantly coming up with new ideas, products and solutions that meet people's needs. Also, as India and China become more capitalistic societies and join the modern global economy, there's a new population base of 2.5 billion people just waiting to buy American goods and services.
Q: When the dust settles, what will happen to the people whose credit has suffered? Will there be special consideration for those directly impacted by this disaster?
Perhaps, but I suspect that credit standards for consumer as well as business loan approvals will go up, rather than down, in coming years.
A big part of what got us into trouble in the first place was a significant relaxation of prudent loan underwriting standards and the advent of loan instruments like subprime loans, liar loans, etc.
I suspect we'll still have mechanisms in place to assist first-time homebuyers and low-income homebuyers. But the magnitude of these programs, especially for consumers with spotty credit records, will be far smaller than in 2006.