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Friday Financial Five – April 25th, 2014

Friday, April 25, 2014


High frequency traders face lawsuit

It was just a matter of time before the practice of high frequency trading, recently exposed on a national stage by Michael Lewis, faced a legal challenge. Front running typically pertains to one party buying or selling based on another parties’ non-public trading information. With that in mind, the initial class action lawsuit (filed by the city of Providence) may have merit, based on the accusation that high frequency traders front run electronically. It will also be interesting to see how any projected damages would be calculated. There are plenty of well known names on the list of defendants and the number of plaintiffs is expected to grow.

IRS audits small percentage of large partnerships

It stands to reason that the Internal Revenue Service would utilize resources to most cost effectively review tax returns. This usually means a focus on the bigger fish, so the government is bringing in more tax revenue than it spends to perform audits. But asReuters points out, according to the Government Accountability Office, less than one percent of large financial partnerships with over $100 million in assets were audited in 2013. This is a tax advantaged group and includes hedge funds. The IRS responded to the GAO report "budget reductions over the past few years have severely limited our work in this area."

No signs of the “wealth effect”

According to the chief economist at JP Morgan Chase, the abundance of wealth created in the last five years has yet to materialize in a commensurate increase in consumer spending. The “wealth effect” in economics surmises that increased wealth will lead to increased spending, increasing economic activity. Many dispute that attaining wealth will cause individuals to spend, especially if those with increased wealth were already rich. Plenty of evidence suggests spending doesn’t increase or decrease with the stock market. Also, the country is de-leveraging, focusing on individual responsibility for retirement, and facing an increased tax environment. It makes sense that increases in wealth would be saved or used to pay off consumer debt.

Setback in March home sales

Home purchases in much of the country hit a snag in March, a sign housing momentum is slowing. Despite the downturn in sales, prices of both new homes and existing homes continue upward. The median new home price hit $298,000 and the median existing home price hit $198,000. The combination of higher prices and increased mortgage requirements may be putting the strain on buyers, but sellers apparently are continuing to hold firm on price.

The settlement that apparently wasn’t a settlement

The recent news that Bank of America had settled for $9.5 billion may not be the end of that issue. The Justice Department is interested in making sure BOA becomes the leader of the pack in mortgage related restitution, requesting payback totaling more than JP Morgan’s $13 billion settlement. According to Bloomberg, BOA has already spent over $50 billion since 2008 resolving this mortgage issue.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected] .


Related Slideshow: 7 Strategies for Rhode Island Economic Development in 2014

What will it take to move the Rhode Island economy forward in 2014?  GoLocal talked with elected officials, candidates, and leaders for their economic development plans in the coming year. 

Below are key elements of the economic priorities for Governor Lincoln Chafee, Speaker of the House Gordon Fox, Senate President M. Teresa Paiva-Weed, House Minority Leader Brian Newberry, gubernatorial hopefuls General Treasurer Gina Raimondo and Ken Block, and RI Center for Freedom and Prosperity's Mike Stenhouse.  

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Governor Lincoln Chafee

"My goal is to have the state continue to focus on the fundamentals.  We will invest in education, workforce development and infrastructure , and provide aid to  cities and towns to lessen the burden on property taxpayers.  I’m confident that these investments and our focus on the basics will allow Rhode Island to exceed Moody’s predictions.”
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Speaker Gordon Fox

"Among the many pieces of legislation the House will address will be issues of higher education affordability, expanding apprenticeship opportunities, and offering help to our manufacturers.  We will also look closely at our tax structure to make sure we are competitive with our neighboring states, including the corporate tax and the estate tax, and I will carefully review the recommendations of the commission studying our sales tax.”

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Senate Pres. Paiva-Weed

Greg Pare, spokesperson for the Senate President, said that the Senate is planning to issue recommendations soon on workforce development initiatives to address the skills gap among Rhode Island job seekers.

"An example of a proposal anticipated in that report is the elimination of state’s Indirect Cost Recovery on the Job Development Fund, which is about $1.2 million this year. Those funds would be directed towards job training and skills development programs to provide immediate impact and help workers gain the skills necessary to succeed in today’s economy."

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Gen. Treasurer Raimondo

"To grow our economy, we need to make Rhode Island a leader in manufacturing again.  Great things can happen at the intersection of government, higher education, and the private sector.  Rhode Island is lucky to have thriving institutions in each of these three sectors, and we need to foster collaboration among them to find solutions to our challenges, and spark our economy.  

By promoting partnerships in high-growth areas, [Rhode Island Innovation Institute] will help grow our manufacturing base, and create new, high-quality jobs."  

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Ken Block

"First, we need to fix Rhode Island’s broken Unemployment Insurance program. The state’s Unemployment Insurance tax, paid by employers, is ranked worst in the country by the Tax Foundation. It is one of the factors that makes Rhode Island an uncompetitive place to do business. Also, it is inherently unfair that a large group of businesses are effectively subsidizing the payrolls of a small group of businesses who misuse the system. There is a simple change to state law that can fix this problem."

"Rhode Island’s temporary disability tax (TDI) is broken, and places an unnecessarily high tax burden on Rhode Islanders. This tax, paid for by employees, will be reduced by changing the way we manage the program. As Governor, I will substantially reduce the cost of purchasing this insurance by requiring that Rhode Island’s program adhere to national norms."

"To best encourage new job creation, I propose the following tax incentive: exempt from future capital gains taxes any new investments in Rhode Island-based businesses. This change would create a powerful incentive for investors who are deciding where to locate a new business, or where they relocate an existing one. This proposal has the potential change the economic playing field for Rhode Island."

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Minority Leader Newberry

“It would be overly ambitious to set being #1 as a goal right now, but we think 25, the middle of the pack, is a reasonable goal to set, one we think we should pursue, and one we can achieve,” said Newberry. "One of the initiatives is a requirement that every bill receive a fiscal evaluation before it can be heard by committee, better insuring that legislators know the real cost of the legislation they are acting on."

"Another proposal would exempt social security income from RI state income tax, making Rhode Island more tax-friendly for our seniors and keeping them here rather than migrating to more tax-friendly states."

“Strong action is way overdue here. Nearly 60% of Rhode Islanders now believe that the state is headed in the wrong direction. We think they’re right, and our central goal is to get it turned around."

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Mike Stenhouse

"As part of the Center's 2014 Prosperity Agenda we recommended that the state:
Repeal or rollback of the state’s regressive sales tax; or the requirement that families have no choice on what schools best educate their children; or punitive estate taxes that drive wealthy people to other states; or restrictions on out-of-state companies to sell health insurance in RI; or the minimum franchise tax, which stifles entrepreneurship; or corporate welfare, to level the playing field; or even renewable energy mandates that drive up costs for every family and business …"

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