Financial thoughts

Shoppers in several states will be able to save money on back-to-school items this month during "sales tax holidays" — but the temporary windfall comes at a hefty price for cash-strapped state governments.

Over the next few weeks, 13 states will offer sales-tax waivers on everything from clothing and shoes to school supplies and computers. The bulk of these holidays, which typically last for three days, began Friday.

Two other states — Georgia and Mississippi — completed tax holidays last weekend.

But tax holidays have been canceled this year in Massachusetts, Florida, Maryland and the District of Columbia. In Illinois, plans to hold a tax holiday this year were put on hold.

"States are canceling their tax holidays now because they realize it’s going to cost the government money, and they’ve decided they can’t afford it," said Mark Robyn, staff economist at the Tax Foundation, a nonpartisan educational organization.

The recession has strained state budgets across the nation as tax revenues dwindle and citizens become more reliant on social services, driving costs up.

State legislators and governors had to contend with deficits totaling $142.6 billion as they closed out fiscal 2009, which ended on June 30 for 46 states, according to the National Conference of State Legislatures.

That makes tax holidays unpalatable for many states. Massachusetts, for example, would have lost $15 million in tax revenue as a result of the holiday, Robyn said instant cash advance.

Proponents argue that tax holidays can help revive dismal retail sales and give struggling households a break during a time of economic recession.

At least one state, Mississippi, held its first tax holiday this year, according to tax-information firm CCH.

Daniel Schibley, senior state tax analyst at CCH, points out that some states view tax holidays as a way to overcome their budget problems.

"Although states are facing serious budget issues, generally they seem to be reluctant to cancel their tax holidays as a way to increase revenue," Schibley said.

"In fact, hard times may be seen as a justification for these holidays, both as ‘relief’ for hard-pressed consumers and ’stimulus’ for hard-pressed retailers," he added.

But critics say tax holidays don’t give consumers any incentive to keep spending once the holiday ends, and provide only a temporary boost for retailers.

"Politicians claim [tax holidays] are a boost for the economy, but it’s just a windfall for people who would have made those purchases anyway," Robyn said. "Generally, sales tax holidays are a pretty horrible policy." 

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Charitable giving didn’t dry up with the recession, but it did become more selective.

You aren’t seeing donation pledges and checks tossed around casually in 2009. Instead, corporations and individuals alike are deciding what they care about most and directing their giving strategy accordingly.

That prudent philosophy has prompted nonprofit organizations to hold their friends close.

"We’re seeing board members and major donors being asked to contribute more this year, the general thought being that the more connected that donors are, the more they’ll give," said Nancy Raybin, managing partner at Raybin Associates, a New York-based fundraising consulting firm.

Eighty-one percent of corporate donors surveyed nationally by the LBG Research Institute said they’re donating more strategically in 2009. A 3 percent to 5 percent decrease in corporate and foundation giving this year is likely, according to analysis of the data.

"Environment, basic needs (food, clothing and shelter) and education were given by corporations as top priorities," said Donna Devaul, executive director for LBG Research in Stamford, Conn., which tracks corporate charitable giving. "But it looks like arts and culture will be hit hard."

Considering how financial markets tanked in 2008, it is heartening that charitable giving decreased just 2 percent, to $308 billion, from the prior year, according to the Giving USA Foundation.

Individuals, like corporations, must examine how well a cause or organization still fits their priorities and whether its results meet their approval. If an individual has favored charities, those charities probably need help more now than they have in many years.

"If you’re going to do meaningful charitable giving, it is important that you develop a plan for it," said Marilyn Capelli Dimitroff, president of Capelli Financial Services in Bloomfield Hills, Mich. "That means deciding where to give, knowing the tax considerations, keeping records and investing properly."

Individuals should check out any charity they are considering with the Better Business Bureau’s Wise Giving Alliance on its site, www.give.org, and also consult the American Institute of Philanthropy’s site, www.charitywatch.org.

Understand tax terminology no matter what the type of donation.

Tax-exempt means the organization doesn’t have to pay taxes, while tax-deductible means you can deduct your contribution on your federal income tax return low rate payday loans. Even if an organization is tax-exempt, your contribution might not be fully tax-deductible.

"If you’re buying a table at a dinner for a charity, that’s not 100 percent tax-deductible because there’s a value to the food you’re receiving," Capelli Dimitroff said. "Obtain a letter from that charity that documents how much was actually deductible."

Learn the basics, such as these on noncash contributions from Capelli Dimitroff:

— Get a receipt from the charity and keep reliable written records. Canceled checks can be used as a receipt at tax time.

— For contributions valued at $250 or more, you must get a written acknowledgement from the charity that follows IRS guidelines.

— The online guide to general values on the Salvation Army site, www.salvationarmyusa.org, is a good resource for assessing appliances, clothing, furniture, household goods and miscellaneous items.

— Photograph what you’re donating. Lay out everything, take a photo with a digital camera and store the file.

Donations should be a component of your overall investment and tax strategy.

"One very convenient, straightforward way to donate on a regular basis is through donor-advised funds," said Capelli Dimitroff. "You open a charitable account in your name or your family’s name and can donate securities to it."

A donor-advised fund (also known as a charitable gift fund or charitable gift trust) lets a donor make a contribution to a special fund and take a tax deduction. At some point, the donor advises the fund of a nonprofit organization or organizations where that money is to be directed.

This lets the donor manage charitable giving like a foundation without the expenses typically required in setting up a foundation.

The money is invested for the best return while the donor decides where to donate it. The contribution to the fund is tax-deductible as a charitable contribution in full in the year the contribution is made.

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For some banks, the grim reality is that another dose of TARP may be their best shot at salvation.

Overwhelmed by loan losses, some hard-hit lenders are hitting up the Treasury Department for even more money from the Troubled Asset Relief Program.

Last week, Midwest Banc Holdings (MBHI), a community bank based just outside of Chicago, outlined an extensive capital raising initiative after suffering its second consecutive quarterly loss. The bank said it had applied for as much as $138 million under Treasury’s Capital Assistance Program, or CAP, an extension of the original TARP. The bank received $84.7 million in TARP funds last December.

Citizens Republic Bancorp (CRBC), a Flint, Mich.-based bank that has suffered along with the local automotive industry, revealed in late June that it too was considering tapping up to $290 million from CAP, part of which would be used to redeem a portion of the Treasury’s original $300 million investment made last December.

Experts say it seems certain that more small banks will follow the lead of Midwest and Citizens Republic.

"I think we have only started to hear about the applications for CAP," said Eileen Rooney, an analyst with Keefe, Bruyette & Woods.

Feeling the pressure

A combination of factors are driving banks to seek even more government assistance. Banks are facing intense pressure from regulators to raise new capital, particularly in the form of stock, which boosts a firm’s closely-watched tangible common equity levels, a key gauge of their capital health.

Complicating matters further is the fact that many community and regional lenders are having a difficult time attracting fresh funds from the private markets. Investor demand for new stock and debt from smaller banks has tapered off significantly over the past two years.

As a group, banks and thrifts have raised just $306 million in subordinated debt so far this year, according to research firm SNL Financial. That’s a fraction of the $12.7 billion during the same period in 2007.

"You have got a lot of banks and boards of banks who are really between a rock and a hard place," said Lawrence Kaplan, a former attorney for the Office of Thrift Supervision who now focuses on bank regulatory issues for the law firm Paul Hastings my credit score.

Widespread credit problems aren’t helping small banks either, particularly the rapidly deteriorating commercial real estate market. Roughly one third of all loans held by regional banks, on average, are tied to commercial real estate in some way, according to Moody’s.

Making the cut

So far, Treasury has invested $204 billion in more than 500 different financial institutions through TARP as of the end of July. Treasury has not revealed how many lenders have submitted applications for funds under CAP. Banks have until November 9 to apply to the program.

This time around however, experts anticipate the government will be a little more selective about who they approve for more funding.

With the U.S. financial system and broader economy no longer on the brink of collapse, regulators arguably have a better sense of how the different corners of the nation’s banking industry are faring than they did during the panic-stricken days of last fall.

In addition, lawmakers and the Obama administration alike have become increasingly wary about committing ongoing aid to troubled financial institutions at the expense of American taxpayers.

Last month, the White House rebuffed requests for aid from CIT (CIT, Fortune 500), prompting the commercial lending giant to seek help from its bondholders.

But if Treasury specifically uses CAP to target wobbly community and regional lenders, the government may be able to provide aid without fear of a public backlash, said Douglas Elliott, a fellow at the Brookings Institution.

Unlike large Wall Street firms such as Citigroup (C, Fortune 500), Goldman Sachs (GS, Fortune 500) and Bank of America (BAC, Fortune 500) that continue to play the role of public pariah, small banks boast a much friendlier relationship with local borrowers. At the same time, they avoided the hot-button issue of big bonuses that has incensed taxpayers.

"The political landscape is a lot more favorable for [community banks]," Elliott said.

Talkback: Should the government concentrate more on helping smaller, community banks instead of giants like Citigroup and Bank of America? Share your comments below. 

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Guaranty Bank is hardly a household name. But the Austin, Texas-based thrift’s looming failure is shaping up as a big headache for bank supervisors — not to mention a black eye for Carl Icahn and others in the smart money set.

Guaranty (GFG) could be soon seized by the government in what would be the biggest bank failure in a year that has already had 64 of them. Last week, the bank warned investors to expect a federal takeover after regulators forced a writedown of its risky mortgage investments and a bid to raise new capital failed.

Guaranty has $13.4 billion in assets and operates 160 branches in Texas and California — two of the three best banking markets in the nation, thanks to their size and population growth.

But the bank’s capital problems and its smallish, scattered network of branches could detract from Guaranty’s appeal, making it tough for regulators to find a buyer quickly — or without substantial federal subsidies.

"This may not be closed as quickly as you think, since it will require bids and rebids," said Miami banking consultant Ken Thomas.

That means resolving Guaranty’s failure is likely to be costly to the FDIC’s deposit insurance fund, whose balance is at its lowest point in almost two decades.

The Federal Deposit Insurance Corp. isn’t the only one taking its lumps. So have some big investors.

Shares of the bank’s parent, Guaranty Financial, have dropped 97% since a group led by billionaire Texas hotel mogul Robert Rowling and Icahn, the renowned New York corporate raider, poured $600 million into the company in June 2008.

Other big Guaranty holders whose stakes stand to be wiped out include hedge fund managers David Einhorn, who was among the most persistent skeptics of Lehman Brothers before its collapse, and Dan Loeb.

"Relatively low franchise value and the fact that two big money investors already got burned on this bank may suggest less interest than with BankUnited," said Thomas, referring to the Florida thrift that failed in May and was bought by a group of private equity investors.

BankUnited had half as many branches and operated in only one state, but had a strong competitive position in the most lucrative counties — something Guaranty lacks.

Despite BankUnited’s relative attractiveness, its sale to investors led by vulture investor Wilbur Ross was hardly a walkover for the FDIC. The deal cost the FDIC insurance fund $4.9 billion.

A big tab on Guaranty would be costly to the deposit fund, whose balance was $13 billion at the end of the first quarter. The FDIC has estimated failure costs on cases since then at $11.2 billion.

A spokesman for the FDIC stresses that it has already set aside an additional $22 billion for failure-related costs in 2009, and adds that congressional action this spring gave the agency access to $500 billion in Treasury credit unique business cards.

Though Guaranty has been around since 1988, it came public less than two years ago. Guaranty was part of the Temple-Inland (TIN) cardboard-box conglomerate until Icahn pressured the company to split up at the end of 2007. Guaranty shares were then distributed to Temple-Inland holders.

Guaranty’s chief executive at the time, Ken Dubuque, assured investors that despite the gale force winds sweeping the financial world, the bank would be safe.

"We’re keenly aware of the importance of good credit, disciplines and effective risk management, in good times and in difficult times," he said on the bank’s first earnings conference call in February 2008.

But Guaranty’s risk management soon was found wanting. The bank aimed to expand beyond lending to the builders of office buildings, shopping centers and houses to new areas such as small business and corporate energy lending.

Because its thrift charter obliges Guaranty to keep 70% of its assets in housing-related investments, the bank matched growth in other areas with expanded investments in housing. That, Dubuque said, is how the bank ended up taking on a giant portfolio of mortgage-backed securities, backed largely by option adjustable-rate mortgages in California and Texas.

"We needed to increase the size of the balance sheet, so that was a relatively risk-free way of doing it," Dubuque told investors in 2008. "We also have liked the returns in that business as well."

But securities backed by option ARMs are anything but risk-free, as investors have learned. Among institutions that dealt most heavily in those were Washington Mutual, the Seattle thrift that collapsed in September with $307 billion in assets, and Wachovia, which was sold to Wells Fargo (WFC, Fortune 500) later in 2008. Other big option ARM users included failed California savings banks Downey Financial and PFF.

Losses built at Guaranty over the past year, and Dubuque quit without explanation in November. In April regulators told Guaranty to raise more capital. When that effort failed, they told Guaranty to write down the value of the mortgage-backed securities by more than $1 billion. That move, announced this month, left the bank with negative capital of $748 million, according to filings.

Despite its many problems, Guaranty is — for now — operating as usual.

"We are open for business. We continue to work with our regulators," Guaranty said Friday in an emailed statement. "We are focused on providing the best customer service possible and believe we can avoid any disruptions to our customers."

Talkback: Do you think more big banks are likely to fail? Share your comments below. 

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California may have a budget, but that doesn’t mean it has the money to cash the $1.1 billion in IOUs sent out this month.

The state Controller’s Office, which has issued nearly 220,000 IOUs to residents, government agencies and contractors, likely won’t know until the end of next week when it can start trading the IOUs for cash. First it must review the new budget to determine when there will be enough funds in the state coffers.

Gov. Arnold Schwarzenegger signed a contentious budget agreement Tuesday that closes a $24 billion deficit in large part by slashing $15 billion in spending. The governor vetoed another $489 million in spending, mainly from health and human services, after lawmakers rejected a plan to tap local governments’ gas taxes and allow new offshore oil drilling.

The state Finance Department is expected to send the agreement to the controller next week. It will then take the Controller’s Office three or four days to crunch the numbers.

"We will develop the cash flows so we can determine when the state will have sufficient funds to pay all its bills and repay all the IOUs already issued," said Hallye Jordan, a controller spokeswoman.

Controller John Chiang started mailing IOUs on July 2 to preserve enough cash to cover debt payments and fund education. The state was facing a $400 million shortage for July. The figure was revised downward from nearly $3 billion after June cash flow figures were calculated.

It was the first time the state issued IOUs since 1992, though it did delay payments in February during another cash crunch cash advance online.

The IOUs went mainly to residents and companies owed tax refunds, as well as social service agencies and state vendors. They were told they could redeem the paper on Oct. 2 or when the state has enough money in the bank, whichever came first. They will be paid an interest rate of 3.75%.

At least some are not pleased that they have to wait to see their money.

Carol Gillis, an Anaheim mother of five grown children, was depending on a $958 tax refund to help cover the rent and motor vehicle fees after her husband’s pay was cut. Instead, they got an IOU.

"I feel that it is my money and I should never have had to wait in the first place," said Gillis, an accounting clerk. "To wait even longer just makes me angrier."

How has President Obama’s $787 billion stimulus program affected you or your community? Are you seeing a benefit from the Making Work Pay tax cuts or the additional $25 in unemployment benefits? Are you seeing construction jobs or other stimulus-funded work in your neighborhood? Do you still have a job because of stimulus funds? We want to hear your experiences. E-mail your story to realstories@cnnmoney.com or send in an iReport and you could be part of an upcoming article. For the CNNMoney.com Comment Policy, click here. 

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The pace of the U.S. economic recession slowed or stabilized in most areas of the country, a Federal Reserve report said Wednesday, pointing to a protracted period of weakness even as the economy transitions to recovery.

Labor markets across the country were "extremely soft," with little upward pressure on wages, the Fed said in its Beige Book survey of economic conditions through July 20 fast cash advance.

Wages and compensation were steady or falling in most areas, the Fed said. Employers reported different methods of cutting pay in addition to, or instead of, freezing or lowering wages, it added. 

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