April 20, 2024

In Cyprus, Feeling the Pain of a Bailout

“The screen says 20 cents, but according to the troika it’s zero,” he said angrily. He was referring to the three international lenders — the European Commission, the European Central Bank and the International Monetary Fund — that had devised the tough new program that requires shareholders, bondholders and depositors to share with European taxpayers the cost of bailing out Cyprus’s two biggest banks and preventing the government from going bankrupt.

“We were a member of the European family,” he continued. “Now it seems they want to push us out of the euro.”

For 20 years, Mr. Agrotis was a stockbroker at Bank of Cyprus, the country’s largest financial institution, and until the shares were recently wiped out, he and his family had much of their wealth tied up in the bank via shares, bonds, retirement funds and — now — frozen deposits. Under terms of the bailout, shareholders’ equity in the bank has been eliminated.

But while Mr. Agrotis and his compatriots may be feeling enormous pain, the broader reaction by investors in Europe and beyond was more or less muted on Thursday, as it has generally been since the Cypriot bailout negotiations burst into chaotic public view the weekend before last. For the broader world of finance, the prevailing view — for now, at least — seems to be that the implosion of this tiny island economy of 20 billion euros ($25.6 billion) need not wreak broader market havoc.

Within Cyprus, though, as the realization sinks in of how badly the national economy might be ravaged by the combination of capital controls on the flow of money out of the country and an indefinite freeze on the bulk of bank deposits, frustration is flaming into full rage. Some establishment figures are now openly discussing the option of leaving the euro currency union and defaulting on the country’s loans.

“Two weeks ago exiting the euro was never mentioned; now it is being widely discussed and a lot of people are considering it,” said Nicholas Papadopoulos, the chairman of the Cypriot Parliament’s finance committee, whom many here see as a future candidate for the presidency. “Europe has destroyed our banking system; now we need to consider all our options.”

Like Mr. Papadopoulos, Mr. Agrotis, who is 56, is no one’s version of an extremist. He is a solid member of Cyprus’s financial establishment, and his ancestors were founders of Cyprus’s most venerable financial institutions.

So convinced was he, even in recent weeks, that Bank of Cyprus was too big to fail that Mr. Agrotis even increased his stake, buying additional shares as the stock hit new low after new low.

Now, like just about everyone on this shellshocked island, he is groping for answers.

Turning from the carnage on his computer screen, Mr. Agrotis took off his glasses and rubbed at eyes bloodshot from the many sleepless nights he had spent poring over economic papers, analysts’ reports and political histories. It was all part of a fruitless search for a theory or precedent that might explain the terrible predicament that had fallen upon him and his countrymen.

On a computer screen, the downward fever chart is the symbol of loss in the world of money, equally understood by the day trader in his living room or the globe-trotting hedge fund investor.

But for Mr. Agrotis and many others in this tiny country of fewer than a million people, Bank of Cyprus’s plunging chart line means much more than the mere evisceration of a lifetime’s savings.

Article source: http://www.nytimes.com/2013/03/29/business/global/pain-begins-to-register-in-cyprus.html?partner=rss&emc=rss

Bulletproofing Your Finances


Ralph Bruce, 78, works as a casino security guard. He took the job because his Social Security wasn’t enough to cover the basics.


Pushing 80, and Still Punching the Clock

Workers age 75 and older make up less than 1 percent of the United States work force, according to federal data, but that proportion is likely to increase as conventional retirement funds dwindle.

Article source: http://www.nytimes.com/pages/business/businessspecial5/index.html?partner=rss&emc=rss

Deal Professor: The Risks of Tapping Your Retirement Fund for an Alternative Use

Deal Professor 401kHarry Campbell

Retirement funds are being used increasingly for anything but retirement. Instead, 401(k)’s and individual retirement accounts are becoming money pots used to invest in business start-ups, speculate in gold and buy private equity investments.

Such maneuvers come with big tax advantages. But they may also leave their users penniless in retirement, while their ability to evade taxes can cost the government.

My interest was piqued by a recent ad in an airline magazine. It called on people to leave their mind-numbing jobs and use their retirement funds to start a franchise business. Invest in yourself was the idea.

I was startled at the directness. I.R.A.’s and 401(k)’s were never meant to be used to start a business. After 15 minutes on the Internet — one of the few upsides to air travel these days — I discovered armies of advisers willing to charge a fee to help you use your 401(k) or I.R.A. to start a business.

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One of leaders in this nascent industry is Guidant Financial. You can get an idea of what this is about from its Web site, which asserts that “by rolling your existing retirement funds into an iFinance plan you can invest in a small business or franchise inside your retirement plan … without tax penalties!”

The strategies to do so and not run afoul of I.R.S. regulations are varied, but the main one is to start a business and have it adopt a 401(k) plan. The existing 401(k) plan is rolled into the new one, which is invested in the new business. Voilà — instant financing. The downside, however, is that there is no money for retirement if the business fails.

And there is evidence that most of these businesses do fail. The Internal Revenue Service terms one form of this scheme as a Rollovers as Business Start-Ups plan, or perhaps with some unintended irony, a ROBS plan. In 2009, the I.R.S. studied ROBS plans and found that most of these businesses had gone bankrupt, losing the person’s retirement savings. In most cases the money was lost before the business even got off the ground. Nonetheless, the I.R.S. does not prohibit ROBS plans, but it has called for more scrutiny of the structure.

This has not diminished the ardor of franchisers and other investment advisers selling such plans. They aggressively market them to would-be entrepreneurs. Figures are hard to come by, but the chief executive and co-founder of Guidant, David Nilssen, recently told The New York Times that inquiries about these types of plans were up 196 percent in 2011 from 2009.

Yet this is not the only way use your retirement fund for something other than prudent retirement planning. A business even bigger than self-financing a start-up is the self-directed I.R.A. As of 2011, some $94 billion was invested in these plans, according to the Investment Company Institute.

Self-directed I.R.A.’s allow for speculation in much sexier investments, like gold bullion, oil and loans. But that is only the beginning. Want to own a rental home? You can do that through your I.R.A. How about cattle or llamas? You can do that, too. There’s even the case of someone who bought musical instruments using a retirement fund and rented them out for tax-free income.

Not surprisingly, the biggest growth area in alternative retirement fund investing is commodities. Gold I.R.A.’s are particularly popular, and one of the largest advisers in this area, the Entrust Group, recently stated that the value of these holdings at the firm had grown by more than five times in 2012.

This brings us to another oft-promoted feature of these funds, assuming the investments work out. Self-directed I.R.A.’s are great tax shelters because the money inside it, like money in a regular I.R.A. or 401(k), is untaxed until withdrawn. These plans offer tax savings that regular investors cannot get because they defer taxes for decades. And if the investments are made through a Roth I.R.A., the gains are completely tax-free.

Mitt Romney’s experience illustrates the effectiveness of this strategy. When he was at Bain, he funneled his private equity investments into a tax-sheltered retirement fund, investing an unknown amount, but likely about $450,000. That amount is now worth $20.7 million to $101.6 million. All of this gain has been tax-free, so far. Entrust, by the way, has an article on its Web site that promotes self-directed I.R.A.’s, citing Mr. Romney’s use of them to shelter up to $100 million in gains.

And if the tax on capital gains rises in coming years, and marketing by these alternative investment firms grows, expect more entrepreneurs and investors to turn to their retirement funds for this type of extreme investing.

Some of these investors will succeed, and these lucky few will pay fewer taxes because of the use of these retirement plans, costing the government money that could total billions. Originally, the idea was that the tax-free nature of this investment was justified to encourage saving for retirement. But that is not what is going on here. Buying mass quantities of gold? This is nothing but speculation. And as is the case with most speculation, the average investor is not likely to make money.

Mr. Romney, of course, as a top private equity executive, knew what he was doing and could afford the loss if things had gone wrong. But the average investor speculating with I.R.A. funds or concentrating them into one investment or a start-up is asking for trouble. There are no statistics on how self-directed I.R.A.’s have performed, but there is no reason to expect that investors in gold and cattle will do any better than those who have day-traded with their retirement funds.

Then there is the fraud issue. Self-directed I.R.A.’s have been a particular target of Ponzi schemes, causing the North American Securities Administration Association to issue a special alert. In the most prominent case of recent note, the Securities and Exchange Commission stopped a number of schemes trying to persuade retirees to buy promissory notes in Turkish investments — yes, Turkish promissory notes — through self-directed I.R.A.’s.

The fact that all of this activity is for anything but retirement is a case study in how legitimate tax policies can be distorted and rules bent to benefit the inventive. More sadly, though, is that a whole industry growing around these investments also shows how some Americans are willing to risk anything for a big jackpot in the markets. And how under the current system, if they succeed, they can do it tax-free, while the rest of us pay taxes.


A version of this article appeared in print on 10/31/2012, on page B10 of the NewYork edition with the headline: The Risks of Tapping Your Retirement Fund for Alternative Investments.

Article source: http://dealbook.nytimes.com/2012/10/30/the-risks-of-tapping-a-retirement-fund-for-an-alternative-use/?partner=rss&emc=rss