Business
Climate graphic of the week: Record lows for rivers across China, US and Europe sap economies
Factories grinding to a halt, crops devastated, cargo ships forced to carry smaller loads and millions facing a risk of blackouts — these are just some of the drastic consequences of record low river levels during droughts that are gripping the US, Europe and now China.
In the US, the historic lows in water levels in the critical Colorado Basin as a result of the southwestern ‘megadrought’ prompted a federal demand for the states of Arizona and Nevada to cut their water allocations by 21 and 8 per cent respectively in the year ahead, in an order from the Bureau of Reclamation last week.
In China, companies including Toyota and Foxconn halted factory operations for at least a week as hydropower shortages worsened. The province of Sichuan relies heavily on hydropower, and the vital Yangtze, the longest river in Asia, reached its lowest level on record for August. Shipping along the nation’s most important waterway was also affected.
Europe continued to suffer as unusually hot and dry weather pushed down the level of the critical Rhine, a major artery that is relied on by industry throughout Germany, Switzerland and the Netherlands. Cargo ships have had to reduce their loads, which has led to higher transport costs and supply chain delays. Limited respite was forecast on the weekend, with rainfall expected in some parts.
“Flowing from the Swiss Alps to the North Sea, the Rhine River is an important shipping route for many products from grains to chemicals to coal,” said the European Space Agency. “When water levels drop, cargo vessels need to sail with reduced load, so they don’t run aground.”
A severe drought in Italy has hit the agricultural sector, as the economically-important Po has reached unusually low levels.
There are many different types of drought, such as agricultural or hydrological, which are complex events that cannot always be definitively linked to climate change. But their impacts are increasingly stark, with extended periods of unusually hot and dry weather, and associated low water levels, recorded in many places around the world this year.
In Alpine regions, as glaciers melt the warming effect is magnified as the darker arid rock that is exposed absorbs the sun’s heat, rather than reflecting it.
“Droughts are not very easy to define and not every drought is the same,” said Liz Bentley, chief executive of the UK’s Royal Meteorological Society. “A changing climate is likely to bring greater variability in rainfall and higher temperatures, meaning that water management may become more of a challenge.”
In the US, the decades-long drought has seen states such as California struggling to restrict water usage for several years. This year, the water levels in the Colorado Basin, a crucial resource for states including Nevada, Arizona and California, have prompted authorities to warn about hydroelectricity shortages causing blackouts.
“The prolonged drought afflicting the west is one of the most significant challenges facing our communities and our country,” said Tommy Beaudreau, deputy secretary of the US Department of the Interior, in a briefing last week.
“The growing drought crisis is driven by the effects of climate change, including extreme heat and extreme precipitation,” he said, adding that around 93 per cent of the western US was experiencing drought or abnormally dry conditions.
Camille Calimlim Touton, the Bureau of Reclamation commissioner, said the system was “approaching a tipping point,” which required states reliant on the Basin to significantly reduce the amount of water they used.
The first six months of 2022 marked the sixth-hottest January-June period on record, according to the US National Oceanic and Atmospheric Administration. The seven years to 2021 were the hottest on record, according to Copernicus, the EU’s Earth monitoring programme.
The world has already warmed by about 1.1C compared to pre-industrial times, and will continue to warm for some time even if every country achieved net zero greenhouse gas emissions tomorrow, according a report from the UN body of scientists.
Global infrastructure and national economies are expected to continue to struggle to cope with the costly consequences of extreme weather that scientists predict as a result.
Shifts observed in the jet stream have contributed to heatwaves, wildfires and drought in the northern hemisphere, while the unusual phenomenon of back-to-back La Niña weather patterns has resulted in flooding and unseasonably cold weather in the south, with floods in Australia and South Africa. In New Zealand last week an estimated 1200 people were displaced by torrential rain.
Global estimated insured losses from natural catastrophes in first half of 2022 stood at $35bn, 22 per cent above the average of past ten years, reinsurance group Swiss Re reported earlier this month. The group said the effects of climate change were evident in increasingly extreme weather events.
“The severe weather events of the past six months once again highlight that natural catastrophes . . . are increasing in frequency and severity in all regions,” Martin Bertogg, head of catastrophe perils at Swiss Re concluded.
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Business
Families can make a tax-free rollover from 529 plans to Roth individual retirement accounts starting in 2024
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Americans who save for college in 529 plans will soon have a way to rescue unused funds while keeping their tax benefits intact.
A $1.7 trillion government funding package has a provision that lets savers roll money from 529 plans to Roth individual retirement accounts free of income tax or tax penalties.
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The House passed the measure Friday and the Senate did so Thursday. The bill heads to President Biden, who’s expected to sign it into law.
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The rollover measure — which takes effect in 2024 — has some limitations. Among the largest: There’s a $35,000 lifetime cap on transfers.
“It’s a good provision for people who have [529 accounts] and the money hasn’t been used,” said Ed Slott, a certified public accountant and IRA expert based in Rockville Centre, New York.
That might happen if a beneficiary — such as a child or grandchild — doesn’t attend a college, university, vocational or private K-12 school, or other qualifying institution, for example. Or, a student may receive scholarships that mean some 529 funds are left over.
Millions of 529 accounts hold billions in savings
There were nearly 15 million 529 accounts at the end of last year, holding a total $480 billion, according to the Investment Company Institute. That’s an average of about $30,600 per account.
529 plans carry tax advantages for college savers. Namely, investment earnings on account contributions grow tax-free and aren’t taxable if used for qualifying education expenses like tuition, fees, books, and room and board.
However, that investment growth is generally subject to income tax and a 10% tax penalty if used for an ineligible expense.
This is where rollovers to a Roth IRA can benefit savers with stranded 529 money. A transfer would skirt income tax and penalties; investments would keep growing tax-free in a Roth account, and future retirement withdrawals would also be tax-free.
Some think it’s a handout for the rich
However, some critics think the rollover policy largely amounts to a tax handout to wealthier families.
“You’re giving savings incentives to those who can save and leaving behind those who cannot save,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
A 2012 analysis conducted by the Government Accountability Office found the typical American with a 529 account had “much more wealth” than someone without: $413,500 in total wealth for the median person, about 25 times the amount of a non-accountholder.
You’re giving savings incentives to those who can save and leaving behind those who cannot save.
Steve Rosenthal
senior fellow at the Urban-Brookings Tax Policy Center
Further, the typical owner had a roughly $142,000 annual income versus $45,000 for other families, the GAO report said. Almost half, 47%, had incomes over $150,000.
The new 529-to-Roth IRA transfer provision doesn’t carry income limits.
Limitations on 529-to-IRA transfers
While the new tax break primarily benefits wealthier families, there are “pretty significant” limitations on the rollovers that reduce the financial benefit, Jeffrey Levine, a certified financial planner and certified public accountant based in St. Louis, said in a tweet.
The restrictions include:
- A $35,000 lifetime cap on transfers.
- Rollovers are subject to the annual Roth IRA contribution limit. (The limit is $6,500 in 2023.)
- The rollover can only be made to the beneficiary’s Roth IRA — not that of the account owner. (In other words, a 529 owned by a parent with the child as beneficiary would need to be rolled into the child’s IRA, not the parent’s.)
- The 529 account must have been open for at least 15 years. (It seems changing account beneficiaries may restart that 15-year clock, Levine said.)
- Accountholders can’t roll over contributions, or earnings on those contributions, made in the last five years.
In a summary document, the Senate Finance Committee said current 529 tax rules have “led to hesitating, delaying, or declining to fund 529s to levels needed to pay for the rising costs of education.”
“Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education,” it said.
Are 529 plans already flexible enough?
Some education savings experts think 529 accounts have adequate flexibility so as not to deter families from using them.
For example, owners with leftover account funds can change beneficiaries to another qualifying family member — thereby helping avoid a tax penalty for non-qualified withdrawals. Aside from a kid or grandkid, that family member might be you; a spouse; a son, daughter, brother, sister, father or mother-in-law; sibling or step-sibling; first cousin or their spouse; a niece, nephew or their spouse; or aunt and uncle, among others.
Owners can also keep funds in an account for a beneficiary’s graduate schooling or the education of a future grandchild, according to Savingforcollege.com. Funds can also be used to make up to $10,000 of student loan payments.
The tax penalty may also not be quite as bad as some think, according to education expert Mark Kantrowitz. For example, taxes are assessed at the beneficiary’s income-tax rate, which is generally lower than the parent’s tax rate by at least 10 percentage points.
In that case, the parent “is no worse off than they would have been had they saved in a taxable account,” depending on their tax rates on long-term capital gains, he said.
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The knives are out for Goldman Sachs CEO David Solomon, and this time the people brandishing them aren’t the usual suspects — his junior staffers annoyed that they have to work late or come into the office several times a week.
Solomon’s problems are more serious and existential, I am told, and how he handles what can best be described as a revolt in some quarters of Goldman’s middle and upper management ranks could determine how much longer he stays in his job.
Solomon, 60, took the job in 2018 and was always somewhat of an odd choice to run the white-shoe investment bank that usually cultivated its leaders from within. He cut his teeth at a decidedly un-Goldman-like venue: the scrappy investment bank Bear Stearns (ultimately one of the causalities of the 2008 financial crisis).
He joined Goldman in 1999, as a partner, no less, because his deal-making chops allowed him to skip layers of management.
In other words, Solomon is an outsider at a firm with a wickedly insular culture. He has a quirky side gig as a DJ in the summer Hamptons party circuit. He’s also not one for small talk, and doesn’t consult with a lot of people before handing down his edicts.
“He doesn’t breed a lot of love,” said one former Goldman executive who knows Solomon well.
Lots of people at Goldman don’t like him, and they’re letting their views be heard both internally and with pals at rival firms.
For the record: I’ve met Solomon and like him for his no-BS style. And until pretty recently, the numbers show him doing a great job. Goldman was running on all cylinders in deals and trading. Even as the market corrects, shares are up about 60% since Solomon took over as CEO in 2018 compared to around a 44% rise in the S&P during that time.
Goldman is still the top M&A shop, even widening its market share over rivals in that important business line. Solomon was the first among his fellow CEOs to see the downturn and enact significant layoffs to cut costs.
Still, the grumbling about Solomon is spreading to the managing director and partner class. High-priced Wall Street talent don’t call all the shots at any firm, of course. But Goldman’s MDs and partners have historically been a powerful force when the board decides the fate of current management, which makes Solomon’s hold on his job increasingly precarious as more and more of them defect from his camp.
Here’s how they’re building a case against him: Goldman’s longtime archrival investment bank Morgan Stanley now easily dwarfs Goldman in market value, $144 billion to $116 billion, continuing a trend that predates Solomon. That comes amid a slowdown in banking deals, Goldman’s bread-and-butter business, and Solomon’s home turf.
Morgan’s CEO James Gorman deftly expanded the firm’s wealth management operations, which provide steady revenues. Solomon’s effort to diversify was an overindulgence in something called Marcus, a digital retail bank launched by his predecessor Lloyd Bankfein that Solomon made his baby. So far, it’s been a disaster, so much so that Solomon has been forced to scale back, possibly on the way to winding it down.
Goldman, meanwhile, has missed targets in its recent earnings announcements, and more downward surprises could be in store as markets continue to wobble. Bonuses are down, in some places cut in half, albeit from the nosebleed levels of 2021.
Traders did well in 2022 because Goldman’s are particularly adept in profiting off turbulence, but part of their pool is being diverted to bankers to keep them in-house until the deal slowdown ends.
Since Solomon is a banker, he’s also being accused of favoritism, which in truth is a pretty lame charge, since bankers often subsidize trader bonuses when the markets aren’t profitable. Still, the Goldman trading department is powerful and can spark management change, as it has done in the past.
There’s also a question about Solomon’s allegiance to Goldman’s stand-alone culture. In its 153-year existence, Goldman has operated on the assumption that it would be the acquirer in any major strategic acquisition. Solomon’s experience at Bear, then one of the most transactional places on Wall Street, means he could be looking for a deal and not one that keeps Goldman in charge.
At a time when most Goldman insiders believe he needs to do a “transformational deal,” i.e., something big that allows it to better compete against Morgan Stanley and super banks like JP Morgan, there is speculation that Solomon might allow Goldman to be swallowed whole by, say, a big asset manager or bank if the price was right.
As best I can tell, this grumbling, though real, doesn’t immediately threaten Solomon’s job. Then again, there is something to be said for keeping your producers happy.
Jack Welch, the legendary CEO of General Electric, was a notorious screamer and demanding beyond belief. Yet Welch knew how to nurture his people.
“Jack could chew your ass, then put his arm around you and make you feel great,” one of his longtime executives, Bob Nardelli, once told me.
It’s why so many other talented execs chose to stay around under Welch, abuse and all, and left when his successor took over, watching GE implode from the outside.
Maybe it’s a good time for Solomon to take a page from Welch and start hugging it out.
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