By adhering to the five basic principles that follow, you can greatly improve your long-term prospects for investing success.

1. Develop a real plan

You must work back from your purpose in investing. For example, if you are investing for retirement, you should have a good idea of:

- When you will retire
- The type of life you will be comfortable leading
- How much you are likely to spend in retirement
- What your current assets are
- What you can expect to save between now and retirement
- Whether that amount will be enough to meet your requirements
- What you might reasonably anticipate earning on your assets
- Your options if something goes wrong: For example, could you return to work?

Developing answers to such questions – even though those answers may change over time – can shed significant light on how much you will need to invest, how you may want to invest it and what other steps you should consider taking.

2. Anticipate the worst, not the best

Don’t live in a dream. Your house could fall in value not rise. Stock returns might have gained value over the last 20 years, but may not rise in the next 20. Anticipate returns on the bad side of average and work with those. No one ever complained about ending up with more money than expected.

Maintaining an emergency fund can also help make sure that you’re able to meet unanticipated financial needs – and prevent you from being forced to sell assets you’d be better off holding.

Finally, calculating conservatively will induce you to save more, expect less and not to bet big on the latest hot idea. This is never a bad thing.

3. Figure out what price to pay

The market price for an investment isn’t always the “right price.” Our world works in fits of enthusiasm and waves of revulsion. Think of the Internet bubble, think of the notion that real estate would always go up or that emerging market stocks should be bought “because” China was growing faster than the US.

Then think what happens if you overpay for an investment by, say, 25%. You will have to earn that much in “real” value merely to end up even. If your investment timeframe is a couple of decades or more, paying the right price is not so critical. But most people earn and save more in their 40s and beyond than they do in their younger years. They may not have multiple decades to make up for mistakes.

4. Keep learning and evolving as the world changes

Over the years, both opportunities and risks can shift dramatically. Keep an eye out for such shifts – and for their implications.

For example, as we already know, not all government entities turn out to be sound investments. We also have a pretty good indication that, in the future, emerging markets will account for much of the world’s growth. Global warming could mean that farmland in Oklahoma goes from being a “good” investment to a “bad” one. Perhaps inflation will be much higher than it has been over the last 20 years.

Keeping your plan on track is an ongoing job. You can’t just make some decisions, however good, at the beginning and then put your portfolio on autopilot. Investing requires ongoing inquiry into economic and financial market developments – it is real work.

5. But be keenly aware of what you don’t know

You must learn and change, but you also must do so deliberately and thoughtfully. We are bombarded by media “experts” telling us that now is the time to do something drastic and buy all sorts of exotic investments that promise all upside and no risk. Let’s get real: Why should anyone share a true bonanza with you? If it’s so great, why do they need your money?

Most investors are much less well-informed about the real value of opportunities and risks than are the institutions with which they invest. There are no sure things. Even the cleverest people make mistakes. Expect only modest returns and avoid extravagant promises.

George Feiger is chief executive officer of Contango Capital Advisors, the wealth management arm of Zions Bancorporation (www.contangoadvisors.com). Contango Capital Advisors is an affiliate of Zions Direct.

However, in 2005 Congress passed an amendment to the rules that will expand Roth IRA opportunities to everyone regardless of their wealth, beginning in 2010.

Roth IRAs: The basics

The general rules of a Roth IRA are that contributions are nondeductible and earnings accruing within the Roth IRA are not taxed at the time that they are earned. Most important, qualified distributions from a Roth IRA are not includable in income. You can’t deduct your contributions from your income going in, but as long as you are making a qualified distribution, the contributions and all of their earnings are not taxed on the way out.

Comparison to traditional IRAs

For the most part, Roth IRAs are treated the same as traditional IRAs. For example, Roth IRAs must be established and maintained by the same types of institutions that maintain traditional IRAs, and the contribution limits are the same. Contributions must be in cash and must be made by the regular April 15 due date for your income tax return. As with traditional IRAs, you can fund Roth IRAs in two ways: making annual contributions and rolling over funds from another account (see below).

Because Roth IRAs are funded with after-tax dollars, any transfer of funds from a traditional IRA to a Roth IRA is subject to income tax at the time of the transfer. To distinguish these taxable transfers from the tax-free transfers among traditional IRAs, a transfer of funds from a traditional IRA to a Roth IRA is sometimes referred to as a “conversion” instead of a rollover.

How to get money into a Roth: Annual contributions

As with traditional IRAs, you can make a contribution to a Roth IRA for each taxable year, limited to the “deductible amount” or 100% of taxable compensation, whichever is less. Even though Roth IRA contributions are not deductible, they are based on the deductible amount for traditional IRAs, which is $5,000 (beginning in 2010, this will be indexed for inflation in $500 increments). Anyone who is age 50 or older before the end of the contribution year may contribute an additional $1,000.

But Roth IRAs have two additional and more restrictive contribution limits. First, if you contribute to both a Roth IRA and a traditional IRA, the maximum contribution limit for the Roth IRA is reduced by your contributions for the year to any traditional IRA. Second, allowable contributions to a Roth IRA are reduced or eliminated if your income is above a certain amount.

In 2009 if you’re a single individual, the amount you can contribute to a Roth IRA will be gradually phased out if your modified adjusted gross income (a tax-related number that is less than your gross income) is between $105,000 and $120,000. For a married couple filing a joint return, the phase-out occurs between $166,000 and $176,000.

It is because of these income limitations that many of you simply have not qualified to use a Roth IRA in the past.

How to get money into a Roth: Conversions under new rules

In the past, not only could your income prevent you from contributing to a Roth IRA, it could also preclude you from converting a traditional IRA to a Roth IRA. Beginning in 2010, though, the income limit for conversions will be lifted. Converting a traditional IRA into a Roth IRA will be treated as a rollover regardless of the conversion method.
Most of the rules for rollovers that apply to traditional IRAs also apply to Roth IRAs, except that there isn’t a one-year waiting period and the taxable amount of any traditional IRA must be included in income in the year of the conversion. There are three ways to do a conversion:

1. You may receive a distribution from a traditional IRA and roll it over to a Roth IRA within 60 days after the distribution.

2. You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA.

3. If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA.

Pros and cons of conversions

The advantages of a Roth IRA conversion include:

• Probability of tax-free future withdrawals

• No withdrawal requirements, even after age 70½

This means that you could continue to grow the assets in your Roth IRA tax free, even after you reach the age of 70½. Any benefit not realized by you could be realized by your heirs. Beneficiaries of Roth IRAs do not have to pay income taxes on the assets, while beneficiaries of traditional IRAs can face hefty income taxes.

The biggest disadvantage of a Roth IRA conversion is the tax bill you will face, particularly if your current income-tax bracket is higher than your anticipated tax bracket upon retirement. Generally speaking, if you would pay the taxes due on the Roth conversion out of the IRA itself, conversion would probably not be appropriate. The benefits of a Roth IRA conversion are compelling only if you can pay the taxes with other (non-tax-deferred) funds.

Note that a special provision applies to taxpayers who convert to a Roth IRA in 2010 only: they can choose to spread the income from the conversion over a 2-year period beginning in 2011 rather than recognizing it entirely in the year of conversion. Before deciding to do this, consider the likelihood of future income tax rate increases after 2010. If you have the means, it may prove to your advantage to accelerate all of the tax into 2010.

Taxation of Roth IRA Distributions

Amounts distributed from a Roth IRA are not taxed as income as long as they constitute “qualified distributions.” In general, a qualified distribution is any distribution from a Roth IRA that you make after the five-tax-year period that began with the taxable year for which the first contribution was made. In addition, the distribution must be:

• Made on or after the date you reach age 59½;

• Made as a result of your disability;

• Made to a beneficiary or your estate after your death; or

• Made for purposes of purchasing your first home.

Traditional IRAs are also governed by those requirements and limitations. However, distributions that are a return of regular contributions to a Roth IRA are never included in gross income, even if made in a nonqualified distribution, because those contributions were made with after-tax income in the first place.

Who would make a good candidate for a Roth IRA conversion?

An ideal candidate for a “strategic conversion” would be someone who:

1. Has “outside funds” (not sheltered from taxes) to pay the income tax on the conversion,

2. Will not need the Roth IRA to meet his or her annual living expenses,

3. Wants to leave a tax-free asset to children or grandchildren, and

4. Expects to be in the same or higher tax bracket in future tax years.

For this group, the Roth IRA is viewed more as a wealth transfer tool rather than a retirement income vehicle. Because Roth IRA owners are not subject to required minimum distribution (RMD) rules, the funds within the account are allowed to grow untaxed. Over a period of years, this growth can be exponential. Further, although Roth IRA beneficiaries are required to take RMDs each year, these withdrawals will be tax-free. Thus, the Roth IRA is the perfect retirement asset for transferring the greatest amount of wealth.

Remember the three factors that are essential to analyzing whether strategic conversions are right for you: The differential that you expect between your current and post-retirement tax-rates, your ability to pay the income tax bill with non-IRA funds, and the length of time between the conversion and your retirement.

Ideal candidates for Roth IRAs

Older workers. If you are still earning income but have already reached age 70½, you cannot make contributions to a traditional IRA but you can to a Roth IRA. Consider contributing to a Roth IRA if you are below the income limits.

Children with earnings. A teenager with modest earnings from summer or after-school work would be well advised to contribute as much as possible to a Roth IRA when the tax cost of doing it would be minimal. (A parent or grandparent who wants to encourage good saving and investment habits might consider making a corresponding gift to the child so that the child could still enjoy the fruits of her labor.) Note, however, that most investment managers and brokerages will not open a Roth IRA account for a minor.

Low-income years. In a year when you don’t have much taxable income, consider contributing to a Roth IRA.

Net operating loss years. A business owner will have years when business losses (as distinct from capital losses) offset all other income. Rather than carry the net loss over to subsequent years, consider absorbing it with income that you would realize from converting a traditional IRA to a Roth IRA.

Grandchildren as Roth IRA beneficiaries. If you will be subject to estate tax, you can directly leave only a limited amount to grandchildren without incurring generation-skipping tax (an onerous substitute for the estate tax that would otherwise be due at the death of the grandchild’s parent had the property been left to the parent instead). Because of the limits, wealthy investors often want to use an asset with the greatest growth potential for bequests to grandchildren. A Roth IRA, with its tax-free compounding and absence of built-in tax liability, makes an excellent candidate for a generation-skipping bequest. Compared with naming a child as beneficiary, naming a grandchild (or an appropriately drafted trust for a grandchild) as beneficiary enhances the value of the Roth IRA to the family. This is true because the grandchild’s significantly longer life expectancy reduces future required annual distributions and therefore enhances the Roth IRA’s potential for tax-free growth.

The deathbed conversion. A person who is not expected to live long, has enough wealth to expect an estate tax, owns a substantial traditional IRA, and has other liquid assets with which to pay the tax cost of conversion should consider converting a traditional IRA to a Roth IRA. All of the income tax that would be due on the traditional IRA would thus be paid before death, which then would reduce the estate tax that would ultimately be owed. Income tax rates are lower than estate tax rates.

Beware of bad advice

Every year the IRS issues guidance about transactions that are designed to circumvent the rules. The IRS remains on the watch for what it calls abusive retirement plans, and it continues to find them, including Roth IRAs. The agency is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs.

Final thoughts

To convert or to not to convert, that is the question. Paying tax today in order to avoid paying more tax in the future may be attractive. The wild card in weighing long-term strategies where taxes are an issue, however, is that we have no assurance that the tax laws will be the same in the future. Congress is always making changes to our tax laws for political and economic purposes. Will future congresses honor the deals made today? Only time will tell.

IMPORTANT NOTES:

The information contained in this document is not intended to be and should not be construed as tax advice. It is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Neither Contango nor WNTC engages in the business of providing tax advice. Clients should consult their tax professional regarding their personal situation prior to taking any action based upon this information. Investment products and services are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value or amount invested.

Image used under creative commons.

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Many people save too little. Sometimes they have unrealistic expectations of what they will earn on investments or what their house will ultimately be worth. Sometimes they let current consumption dominate their concerns and even borrow to consume. But every person has a finite capacity in them for work. It can turn out to be too late to achieve all those goals.

Luckily there are some simple rules of thumb that you can use to frame your saving and investment program. In this article, I will focus on people who live on income from a job — from their human capital rather than from owning a company.

Typically, spending needs (family, education, home) rise into your early 50s. Peak earning years tend to run from your 40s through your 50s. You will need to do a significant part, perhaps the bulk, of the saving for retirement in a short window from your late 40s to your early 60s.

Houses rise in value little more than the rate of inflation. A house is a consumer durable, not an investment. You will always have to live somewhere, so at most you can capture the gap from downsizing. It will be less than you think.

So, financial savings are going to be the primary vehicle for meeting your family goals. How much, then, should you save? The best quick answer is to assume that you can reasonably and safely earn an after-tax return equivalent to a seven- to 10-year municipal security, which is in the 2.75 percent to 3.75 percent range now, depending on the issuer. Take, say, 3.25 percent as the mean and you see that to add $32,500 annually to your ability to consume, you would need to have $1 million in financial assets. That’s a lot, and that is the point.

Of course, that leaves the principal intact. You can choose to invade the principal as you age or you can view it as the cushion for serious illness or other needs. And remember, if you purchase an annuity, you can get more income but there is no estate left.

The moral is simple: Identify a realistic savings goal early, and make yourself stick to it. Do the numbers. Don’t just save “what feels right.”

In Part Two, we will discuss how to approach retirement planning as a business owner.

George Feiger is chief executive officer of Contango Capital Advisors, the wealth management arm of Zions Bancorporation.

IMPORTANT NOTE:
Investment products and services offered through Contango Capital Advisors, Inc., a registered investment adviser and a nonbank subsidiary of Zions Bancorporation, are NOT insured by the FDIC or any federal or state governmental agency, are NOT deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates and MAY be subject to investment risks, including the possible loss of principal value of amount invested.

Featured in the September/October 2009 issue of Zions Bank’s Community magazine.

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It’s impossible to anticipate just what the markets will do in the future, but you can try to limit their negative impact on your bottom line.

Investment strategies are not all the same. You can expect more growth from some strategies than others, but that growth is likely to be uneven, with big swings along the way. A supposedly high-return investment is not much use if you need to sell it to raise cash during one of its downswings, when it has fallen to levels well below its long-run trend. For important goals with reasonably predictable timing like college expenses, you might be better off investing conservatively to increase the likelihood that the money will be there when you need it.

Of course, conservative strategies tend to have lower returns, requiring you to invest more money initially to fund them. You need a lot of income and a lot of savings if all your investment strategies are conservative. However, if your goal is far enough in the future — for instance, retirement for someone in his or her 30s or 40s — you could tolerate the swings in value of more volatile investments to increase the probability of greater long-term growth. The key is to match your investment strategy to your time frame and goal.

You should start by defining your three or four most important family financial goals and creating a dedicated “financial bucket” for each investment. Different time horizons, and different implications of not achieving the particular goal, would dictate markedly different investment strategies for the various buckets. The more time you have, the more ups and downs you can weather on the path to a better overall return. The nearer and more vital the goal, the less you should gamble. For example, strategies dominated by equities have earned more historically than strategies loaded with bonds. So, keep most of the equities in the buckets for long-term goals, and use bonds, CDs and other reliable instruments for near-term and important goals.

Using long-term historical returns for these assets, you can work backwards to the savings rate you will need to reach your goals. If the savings rate seems unrealistic, then you will need to revise your goals and accept the implications of the revisions. But you will have the knowledge that you are making the most of the opportunities available, tailored to your own situation and needs.

George Feiger is chief executive officer of Contango Capital Advisors, Inc., the wealth management arm of Zions Bancorporation. The opinions expressed in this article are his and not necessarily those of Contango or Zions. Contango (www.contangoadvisors.com) focuses on individuals’ real-life goals and uses sophisticated analytical techniques and risk-management tools to design clients’ investment portfolios. In Utah and Idaho, Contango operates under the name Zions Investment Services Group. E-mail Contango at contact@contangoadvisors.com.

Please note: Investment products and services offered through Contango Capital Advisors, Inc., a registered investment adviser and a nonbank subsidiary of Zions Bancorporation, are NOT insured by the FDIC or any federal or state governmental agency, are NOT deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates and MAY be subject to investment risks, including the possible loss of principal value of amount invested.

Featured in the July/August 2009 issue of Zions Bank’s Community magazine.

Market risk is a chance that an investor takes. No matter what the long-term prospects of an investment or its probable intrinsic value, an asset may trade at any price in the market. A trading price is determined by the interactions of buyers and sellers. If there is more buying than selling of an asset, its price will rise; if there is more selling than buying, its price will fall. This means that an investment’s price can rise, fall and bounce around. The extent of these movements is usually described by the term volatility.

We describe Pacific Gas and Electric Company’s stock as having low volatility because it has relatively small price fluctuations, whereas a highly volatile investment like Google stock will be subject to relatively larger price swings. Because the extent and timing of these bounces is unpredictable, the possibility exists that any asset could trade for a price that is lower than you might rationally expect. For investors, these bounces can be a source of concern when they create unrealized losses in a portfolio.

The real risk to investors, however, is that they might need to sell an asset at a relatively low price, thus turning an unrealized loss into a realized one. Also, investors may be forced to write off an asset if it loses its entire market value (traded value equals zero).

Nobody can predict the future. Therefore, we can only estimate when and by how much market sentiment might reverse itself, which types of assets might recover, and which become permanently impaired, as perhaps Citigroup could be. Because investors demand compensation for this risk, a portfolio of more volatile assets will often produce higher long-term gains than a portfolio of less volatile ones, but not always.

We mitigate volatility by diversifying. Because we do not expect all assets to move up and down in lockstep, we smooth out portfolio returns by investing in a broad range of assets. Diversification allows us to balance the ups with the downs and to limit the impact of any asset going to zero. We do not put all our eggs in one basket lest the basket turns out to resemble Citigroup at the end of 2008.

About the author: Elisabeth Kashner is an analyst with Contango’s Investment Strategy Group. She graduated from the University of San Francisco with an MS in financial analysis.

From Contango Capital Advisors, Inc.’s The Capital Advisor newsletter, Spring 2009.

*Artwork from ramsey everydaypants under Creative Commons license at Flickr.com.

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ZIONS BANCORPORATION AND AFFILIATES IN THE NEWS |

Regional and national publications and community leaders have once again turned to Zions Bancorporation and affiliate executives to help give understanding and perspective about our current economic environment. See the links below for more information.

Les Roka of Utah CEO Magazine writes in “Clear the Fog from Annual Reports” of CEO Harris Simmons’ “straightforward approach” when speaking with shareholders.

February 27, 2009
“With a sputtering economy and soaring unemployment numbers, some may question whether now is a good time to be starting a new business. Scott Anderson, President and CEO of Zions Bank, wants to ensure that it is.”

February 12, 2009
George Feiger tells SNL Financial that while funds of funds have been outperforming the market, “they have broken the promise that they won’t go down.”

February 7, 2009
Mike Freeman at The San Diego Union-Tribune reports that “California Bank & Trust will acquire the branches, deposits and loan pool of Alliance Bank.”

January 23, 2009
George Feiger expects economic losses to continue through 2009, the Daily Camera reported.

December 2008
Vectra Bank President and CEO Bruce Alexander tells Jeff Rundles that Vectra is continuing to “make loans” while “being careful and prudent.”

December 5, 2008
Brice Wallace of the Deseret News quotes Contango CEO George Feiger when writing that “the longterm ramifications of the downturn will ‘reshape the topography’ of American retail.”

December 18, 2008
Bruce Alexander, President/CEO, Vectra Bank Colorado, has been picked to take part in a leadership team to “help draft an economic stimulus plan for Denver.”

November 14, 2008
Katie Kuehner-Hebert of American Banker quotes from CFO Doyle Arnold’s presentation at a Merrill Lynch & Co. conference, during which he discussed Zions participation in the Treasury Department’s Capital Purchase Program (article: “Treasury Funds Secured, Zions Looks Outward”)

*Artwork created by City On Fire at Flickr.com.

PLAN AHEAD FOR THE LONG JOURNEY |

There comes a time in nearly every business owner’s life when the question must be faced: Is it time to sell the business and move on?

You can prepare for that question far before it’s time to answer it. By planning ahead, you are more likely to have a better understanding of your options and how each one might affect your personal and financial goals. If you know you’ll want to transition your business in the next five years, now is the time to put the planning wheels in motion.

Step 1: Sketching the Big Picture
Business sales are complex. Before you set out, you should have a sense of where you want to go. Will you retire? Start another business or career?

You’ll need to calculate the price of those dreams. What price can you realistically get for your business? Can you do anything to add value before the sale? What are the transition alternatives?

Step 2: Staging the Business for Sale
If you’ve ever sold a residence, you probably improved and “staged” the home to make it more appealing. Selling a business is the same: You need to “tidy up” to attract a good buyer. But the business equivalent of new paint and carpet is a bit more involved.

Buyers are going to look at both your intangible and tangible assets, so you need to evaluate how you look on paper. For instance, if you’re operating as a pass-through entity and not showing a profit, you might consider restructuring.

Buyers will also look at your business operations. The more capacity there is to leverage operations, market position or finances, the more attractive the business will be to a buyer. So, now might be the time to look at your growth plan.

Buyers will assess the business’s viability without your ongoing involvement. A robust management succession plan should support the business’s value.

Step 3: Accounting for Emotion
Even in the most harmonious families, serious conflicts can arise around the sale of a business. Add in the competing interests of employees, community, partners and your own personal goals, and the emotions can run very high.

A well-conceived plan can address family and estate issues. It can also help you implement key employee incentives that can make your transition much smoother for everyone involved.

Step 4: Protecting Your Assets
If you’re like most middle-market business owners, you may have a significant portion of your wealth tied up in your business. That’s why it’s so important to look comprehensively at the financial impacts of the sale. At every stage, there are opportunities to protect your assets and increase their value —everything from putting a price on the business, structuring the transaction and creating a wealth management strategy for the years after the sale.

Selling is a big decision, but with a good plan, the road to your next adventure in life is just ahead.

Featured in the September/October 2008 issue of Zions Bank’s Community magazine.

Greg Chiampou is Director of Private Business Services at Contango Capital Advisors. Chiampou provides clients with informed strategies for business valuations and positioning, transaction structuring and pre-liquidity planning. Contact Chiampou at 510-558-6000. Email Contango Capital Advisors at contact@contangoadvisors.com.

*Artwork created by Rob Sheridan at Flickr.com.

DON’T LET EMOTION ALONE DRIVE REGULATORY REFORM |

The bloodletting on Wall Street is still in full swing, yet we’ve already begun to hear calls for greater regulation of the financial services industry. Given the magnitude of the crisis, it is likely some regulatory reform will occur. As we go through this process, it’s critical that we keep our wits about us and make decisions based on fact and not emotion.

Indeed, the facts suggest that reforms need to focus on three areas:

• Streamlining our regulatory apparatus;

• Providing greater transparency with regard to valuation and risk; and

• Controlling the use of leverage.

A panicked response that goes too far risks hobbling, or even destroying, institutions and strategies that have created great economic benefits and promise to continue to do so.

Over the past 25 years, we have created financial institutions that facilitate the free movement of capital globally to an unprecedented extent. In particular, the ability to both source and use credit has become much more freely available globally through the process of securitization. Facilitated by a worldwide web of financial institutions (commercial banks, investment banks, insurance companies, exchanges, loan originators and rating agencies), this has provided investors with the assets they wish to hold while reshaping these into the cash flows that businesses and households need.

Simply, credit is the lifeblood of the world economy. In the midst of the greatest credit crisis since the Great Depression, it is easy to forget this. The greatest threat to the real economy in the US now is the banking system’s shrinking capital base, which is making credit harder to get and reducing business investment as well as household purchases of durables.

If we choke off the ability of banks to provide credit in this process of regulatory overhaul, we will have multiplied the magnitude of our current crisis. At the same time, we must address the risks that have brought us to this point, which fall in the categories of linkage, liquidity and clarity.

Quite obviously, market participants today are connected by webs of financial obligation. What happens to one will impact others. This linkage has created the domino effect that has brought down some of our storied financial institutions. Exacerbating this is the fact that the ability to withdraw cash from “lenders” is always illusory if many parties try to do it simultaneously. Attempts to sell assets to provide liquidity simply drive asset values down to ridiculous levels without solving the problem. Lastly, because of the linkage and liquidity problems, if a market party doesn’t know the magnitude of its obligations and risks, the individually prudent action, scurrying to hoard cash, creates the worst collective outcome.

This, of course, brings us to precisely the spot where we find ourselves today. The answer in terms of regulatory reform is to walk a fine line between addressing the issues of linkage, liquidity and clarity and retaining enough freedom for lenders to provide capital to those who need it. Specifically, we need any overhaul of our financial industry regulations to:

• Unify accountability and control: We don’t need the SEC, FDIC, OCC, CFTC and 50 state insurance regulators when the transactions and risks cross all these boundaries. Moreover, because the risks are international in nature, we need, at the very least, clear and explicit cooperation among national regulatory bodies. Ultimately, it seems inevitable that our global financial system will require a global regulatory body.

• Focus on structures not products: Economically, we can replicate options with cash and futures transactions, replace insurance with swaps, and synthetically take credit risk. Products morph in order to slide around regulatory definitions, and regulators have no hope of keeping up with the pace of product innovation. Instead, the regulations should force transparent central clearing mechanisms and transparent and rigorous margining requirements among all the market participants so that aggregate counterparty exposure can always be visible.

• Control the use of leverage: No matter how bad an investment is, it is always made worse by leverage. Equity values can fall to zero; loans always have to be repaid. Regulators need to cap leverage levels. Moreover, it has become apparent that models do not adequately capture the degree of leverage risk. Regulators must be prepared for constant struggle against sophisticated industry arguments for raising leverage caps.

If done properly, such an approach can preserve the best of what we had before while protecting us from the worst.

Originally published by George Feiger 19 September 2008. Email Contango Capital Advisors at contact@contangoadvisors.com.

*Artwork created by roctopus at Flickr.com.

WELCOME TO THINK |

It turns out that this Internet thing is good for more than just sending emails, investing, and viewing weird home videos. And we know that we need to do better at using it to communicate with you.

Armed with that knowledge, we are starting a blog. Those of you in the know understand what a blog is—or at least you have an idea of a few out there—see the value in creating a communication tool where we can talk to you and you can talk to us. But to those who do not know, we’ll explain what it means for Zions and what our purpose will be.

Zions has some talented and capable people that work in our investment group. Like created a model for innovation, quoted in Barrons and BusinessWeek, and Yale Law School graduate intelligent.*

So we thought we ought to share with you their insights about areas of the financial world that we focus on: wealth management, fixed income, municipal bonds, and so on. Read it, share it with others, comment—there’s no sales pitch here, just a conversation that we have started between all of you and all of us. If you want to hear more about something, let us know. If you don’t like something, speak up.

We hope you enjoy this more intimate glance into our world.

*Contango Capital Advisors is a subsidiary of Zions Bancorporation. KNN Public Finance is a division of Zions First National Bank. Both Contango Capital Advisors and KNN Public Finance are affiliates of Zions Direct.

Artwork created by roctopus at Flickr.com.