1031 Exchange Q and A: Unbuilt Property, Incidental Property, and IRS Deadlines

Bill owns a car wash in Chicago, Illinois. He wants to use Section 1031 to exchange his car wash for a tenancy-in-common interest in a shopping mall in Tuscan, Arizona, that will be built next year.

Can he exchange the real property involved in his car wash for real property that is not yet built?

What about the equipment and machinery used in the car wash?

Allso, Bill knows that under Section 1031, he has 180 days from the transfer of his car wash to identify replacement property and complete the exchange. He expects to transfer the car wash in late November, so he figures he has until late April to complete the exchange.

What would you advise Bill?

Bill can exchange his property for replacement property that is not yet built, so long as the replacement property is completed prior to the expiration of the 180 days.

The equipment and machinery used in the car wash (referred to as “incidental property” in Section 1031 exchanges) can be part of the exchange, so long as it meets the requirement that it is typically transferred with the real property of a car wash in standard commercial transactions and the total market value of the incidental property does not exceed 15% of the market value of the real property involved in the exchange.

Bill needs to be very careful if he transfers his relinquished property anytime after October 18.

Remember that the actual deadline for completing an exchange is the earlier of either 180 days from the date you transfer the relinquished property – or the date, including extensions, that your tax return is due for the year in which you transfer the relinquished property. Exchangers must report their exchanges on the tax return for the year in which the exchange begins.

Thus, if you relinquish property after October 18, you actually have less than 180 days to complete the exchange, unless you file for an extension.

If Bill transfers his car wash in late November, he should expect to file for an extension on his tax returns, unless he is absolutely certain that he can complete the exchange before April 15.

For more information on this topic, and for everything you need to know about 1031 exchanges, see our book 1031 Exchanges Made Simple, available at Amazon.com.

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com

Lawsuit Claims $80 Million Stolen in 1031 Exchange Scheme

More 1031 exchange accommodators are in very hot water.

And millions of dollars that people thought were going to be used for 1031 exchanges are missing.

Last week, Edward Okun and others were indicted in a 1031 exchange intermediary scheme that is alleged to have defauded clients of approximately $132 million.

A class action lawsuit has been filed in the California Superior Court of Santa Barbara County alleging that 130 people from 12 states lost over $80 million that they had placed with Southwest Exchange, Inc. (SWX) and several other 1031 exchange accommodators or qualified intermediaries (QIs).

The QIs are alleged to have been taken over by Donald Kay McGhan and other individuals with the purpose of stealing the money that had been entrusted to them to facilitate tax deferred 1031 exchanges.

The lawsuit claims that a “group of thieves discovered that these Exchange Accommodators were unregulated businesses holding large sums of cash that needed ready access to only a small percentage of the money to operate as going concerns. Pursuant to a conspiracy, these thieves purchased several Exchange Accommodators, gained access to their funds held in trust with the assistance of certain brokerage houses, stole the majority of those funds for personal gain, and caused over $80,000,000 in damages which was exposed when the real estate market finally cooled.”

According to the lawsuit, money held in trust by SWX was funneled to shell companies that Santa Barbara businessman Donald Kay McGhan set up to launder the funds, which were then withdrawn for his and his accomplices’ benefit.

The plaintiffs claim that the exchange accomodators were operated as a ponzi scheme by Donald Kay McGhan and his alleged accomplices.

Because the real estate market was hot in 2004 and 2005, money coming in for new 1031 exchanges could be used to cover funds deposited for previous exchanges that McGhan and his cohorts had already raided.

When the real estate market suddenly cooled at the end of 2005, the number of 1031 transactions declined and not enough money was coming in to cover the embezzled funds, according to the suit.

By April 2006, the scheme began to unravel as SWX faced liquidity problems, the lawsuit states, and by October 2006, approximately $80 million was missing from the trust funds.

The QI defendants in the lawsuit include Southwest Exchange, Inc. (SWX), doing business as Southwest Exchange Corporation and Southwest 1031 Exchange, and Qualified Exchange Services, Inc. (QES).

Individual defendants include Donald Kay McGhan, Jim J. McGhan, Dean A. Koch, Nikki M. Pomeroy, Albert Conton, Peter John Demarigny, Kyleen M. Dawson, and Megan L. Amsler.

Donald Kay McGhan, 73, was the founder, chairman, and president of the McGhan Medical Corporation, maker of silicone breast implants and for many years one of the Santa Barbara’s top employers. McGhan left the company, now called Inamed Aesthetics, in 1998, and the company later settled a fraud suit filed by the Securities and Exchange Commission alleging that McGhan had filed false financial statements that misled investors.  McGhan himself paid a $50,000 fine to the SEC.

Additional corporate defendants include Capital Reef Management Corp., Cennedig LLC, Medicor LTD, International Integrated Industries LLC, Ventana Coast LLC, and Sirius Capital LLC.

The plaintiffs also claim that major financial firms Citigroup, Salomon Smith Barney, and UBS Financial Services participated in the scheme.

There is also an ongoing criminal investigation.

You can see the complaint here.

Our advice:

If you’re planning to do a 1031 exchange, make sure that you perform due diligence in your choice of a QI or exchange accomodator, make sure that the QI is bonded, and make sure that you work with an experienced tax advisor and attorney who can help you navigate the 1031 exchange process. 

And, as we’ve said before, it is imperative that the Federation of Exchange Accomodators (FEA) work more closely with state and federal authorities to establish regulations for QIs that will restore and maintain public confidence.

UPDATE:

A $23 million settlement has been reached with UBS Financial Services, one of the defendants in the plaintiffs’ class action lawsuit.  You can read our post about the settlement here.

New Regulation of Credit Industry is Now Inevitable. The Only Question is How Much Regulation, and with How Much Bite?

There can no longer be any question whether there will be new regulation of the credit industry in the wake of the housing meltdown and the mortgage crisis.

The only question now is the extent of the regulation and how much teeth it will have.

Treasury Secretary Henry Paulson eliminated any doubt regarding new regulation when he conceded that the Federal Reserve should bolster its supervision of investment banks while they are taking cheap money from the Fed’s new emergency program.

Paulson said that the Bush administration will soon put forth a blueprint for federal oversight in an effort to promote smoother functioning of financial markets.

”This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions,” Paulson said.  ”These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.” 

Greater oversight is necessary, according to Paulson, to “enable the Federal Reserve to protect its balance sheet, and ultimately protect U.S. taxpayers.”

Wall Street’s major investment banking firms, including Goldman Sachs, Lehman Brothers and Morgan Stanley, averaged $32.9 billion in daily borrowing over the past week from the new Fed program, compared with $13.4 billion the previous week. On Wednesday alone, their borrowing from the Fed reached $37 billion.

To add to the growing conservative consensus that greater federal regulation of the credit market is necessary, Wall Street Journal columnist Jon Hilsenrath wrote on the front page of the newspaper’s Money and Investing section that “if the government is going to intervene aggressively when bubbles burst, as it’s doing now, then maybe policy makers should do some new thinking about how to prevent bubbles in the first place.”

Democrats, both in Congress and on the presidential campaign trail, have called for more extensive and permanent regulation of both the credit market and the mortgage industry than that proposed by the Bush administration.

The final outcome will depend on who wins in November and what happens in the economy between now and the next Inauguration Day. 

But it is now clear that one consequence of the Bear Stearns bailout and the Fed’s cheap money policy for the major investment banks is to have made some form of new regulation of the credit market and the mortgage industry inevitable.

In the meantime, we’re still waiting for the enormous sums of cheap money that the Fed has pumped into the credit industry to make its way down the pipeline to the rest of us in the economy. 

What Property Qualifies for a 1031 Exchange? (Part Two)

To qualify for the tax benefits of an exchange under Section 1031, the property you want to exchange (or relinquish) needs to be “held for productive use in a trade or business or for investment.”

For income tax purposes, real estate is divided into four classifications: (1) property held for business use, (2) property held for investment, (3) property held for personal use, and (4) property held primarily for sale (“dealer property”).

Only property that is held for business and property held for investment qualify for an exchange under Section 1031.

Property held for personal use and property held primarily for sale do not qualify.

Section 1031 does not define either “held for productive use in a trade or business” or “held for investment,” but over time, court cases and IRS rulings have clarified what these terms mean in most instances.

Examples of property that is “held for productive use in a trade or business” and clearly qualify for a Section 1031 exchange include all buildings owned and used by a business, such as factories and office buildings, as well as rental apartment buildings.

Examples of property that do not qualify for a Section 1031 exchange are stocks, bonds, or notes, certificates of trust or beneficial interest, choses in action (a right to recover money or other personal property in a judicial proceeding), or other securities or evidences of indebtedness (with the exception of a 30-year or longer lease).

It does not matter if any of the excluded property items are related to real estate; they are always excluded from Section 1031 exchange.

For example, a note can never qualify for a Section 1031 exchange, even if the note is secured by real property.

Also disqualified from exchange under Section 1031 is inventory, stock in trade, or any other property that is held primarily for sale rather than business use or investment (known as “dealer’s property”).

Property is considered inventory, and therefore not qualified for a Section 1031 exchange, when it is held for sale to customers in the ordinary course of business. For example, if you own a business that sells airplanes, you cannot use one of those airplanes as qualified property for a Section 1031 exchange.

The dealer property exclusion rule also means that real property held for sale by dealers in real estate does not qualify for Section 1031 exchanges.

In determining who is a dealer in real estate, the IRS looks at the facts and circumstances of each case and makes its determination on a property-by-property basis.

While there are no hard and fast rules in this area, in general, the questions the IRS asks are: what is the nature of the taxpayer’s business; for what reason and purpose was the property acquired and/or transferred; for what length of time was the property held; what are the number and frequency of sales; what kinds of construction improvements and subdivision activity was undertaken on the property; did the property have income-producing potential; and what is the percentage of real estate sales as compared to the taxpayer’s other income.

It is important to note that you do not have to be in the business of buying and selling real estate to be treated as a dealer by the IRS. If you are required by the buyer of the relinquished property to undertake subdivision activities or other work in preparation for the buyer’s development of the property, you may be considered to be in a joint real estate venture with the buyer, and the IRS could disqualify the exchange as involving dealer property.

Similarly, an exchange under Section 1031 is not available for real estate “flippers.” “Flipping” property refers to the practice of buying real estate and then quickly reselling it (with or without making improvements) at a higher price.

Property that is “flipped” is not eligible for the tax benefits of Section 1031 for the same reason as the exclusion of dealer’s property. As noted, dealers in real estate may not use Section 1031 because they hold real estate for resale (that is, as stock-in-trade or inventory), and a quick resale (or attempted exchange) of recently acquired real estate signals to the IRS that the property is being used for inventory, not for productive use in a trade or business or for investment.

The bottom line is that you must remain aware of the requirement that both the relinquished and the replacement properties be held for use in a trade or business or for investment rather than resale. If the IRS concludes that either the relinquished property or the replacement property is held by the taxpayer for the purpose of resale rather than use in a trade or business or for investment, then the property will be disqualified from the Section 1031 exchange process
and capital gains taxes must be paid.

In deciding whether a particular property has been held for productive use in a trade or business or for investment, the IRS looks at how you have characterized that property on your tax returns. If you have historically taken depreciation on or reported rental income on a property, there should not be any problem with that property qualifying for a Section 1031 exchange.

Property that does not now qualify for a 1031 exchange can be recharacterized for tax purposes by using it for a trade or business or for investment.

Although there is no absolute rule regarding exactly how long the property must be held for use in a trade or business or for investment before it is recharacterized and can be exchanged – and the IRS insists that it will examine each exchange on a case-by-case basis – most professionals recommend planning for a holding period of two years.

In any event, the best way to ensure that this requirement is met is to consult with both your attorney and your tax advisor regarding the potential for any holding period problems in your agreement with the buyer for your relinquished property, as well as your future plans for your replacement property.

For more information on this topic, and for everything you need to know about 1031 exchanges, see our book 1031 Exchanges Made Simple, available at Amazon.com.

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com

For Part One of this article, click here.

For Part Three of this article, click here.

U.S. Court Rips Subprime Lender as “Ticking Time Bomb” — Faults New Century Executives and Big Four Auditor

The Final Report in the federal bankruptcy proceedings involving subprime mortgage lender New Century Financial Corp. was made public today by the United States Bankruptcy Court for the District of Delaware.

You can read the Final Report here.

Following an investigation that began in June 2007, the 550-page report reviews the accounting and financial reporting practices, loan origination operations, audit committee and internal audit department, and system of internal controls of New Century, once the second-largest originator of subprime home loans in the U.S.

According to the report, the now bankrupt mortgage lender used improper accounting practices while making risky loans, creating “a ticking time bomb” that led to the company’s collapse.

The New York Times has called the report “the most comprehensive and damning document that has been released about the failings of a mortgage business.”

The report states:

“New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy.”

“The increasingly risky nature of New Century’s loan originations created a ticking time bomb that detonated in 2007.”

“Senior management turned a blind eye to the increasing risks of New Century’s loan originations and did not take appropriate steps to manage those risks.”

In one example cited in the report, New Century understated by more than 1000 percent the amount of money it needed to have on reserve to buy back bad loans. As a result, it reported a profit of $63.5 million in the third quarter of 2006, when it should have reported a loss.

New Century also failed to include the interest that it was obligated to pay to investors whenever it was forced to buy back bad loans.

In addition, the report concluded that New Century’s accounting firm, KPMG LLC, one of the Big Four accounting firms, actively enabled New Century’s improper accounting practices. 

Court-appointed examiner Michael J. Missal observed that “As an independent auditor [KPMG is] supposed to look very skeptically at any client, and here they became advocates for the client and in fact even suggested some improper accounting treatment that ultimately started New Century down the road it’s taken.”

The improper accounting also led to higher bonuses for New Century executives.

New Century once billed itself as “A New Shade of the Blue Chip.”

Creditors of New Century now say they are owed $35 billion.

The former subprime lending giant’s stock peaked at nearly $65.95 in late 2004 — on Wednesday it was trading at a penny.

You can read New Century’s Chapter 11 Bankruptcy filings here.

New Century is being sued by hundreds of investors and remains the target of a federal criminal investigation.

Mortgage Scam Website Still Online

We blogged yesterday about the federal indictment in “Operation Homewrecker” of Charles Head and 18 others for what the FBI alleges to be a major mortgage scam that defrauded homeowners of their houses, their equity and their credit.

Today we saw that a website of Charles Head’s company is still online.

The website of Head Financial Services (“The Smart Way to Shop for a Lender”) is hosted by the website for Huntington Beach News.

The website promises that you can “Get 3 competing mortgage bids with one easy form” and that “Lenders are standing by now to serve you.” 

 

A representative of the Huntington Beach News told us that the page was a paid advertisement.

He also said that he didn’t know who had paid for the page, but that he needed to take the page down.

The only link on the page is to Charles Head’s email at charleschead@aol.com.

UPDATE:

The Web page we originally linked to has been taken down.  You can see another Head Financial Web page that is still online here.

We’ve also found a reverse mortgage website that lists Operation Home Wrecker scammer Keith Brotemarkle as one of its brokers.  You can read our post here.

Man Behind 1031 Exchange Scam Indicted for Fraud

The long awaited indictment of Edward H. Okun took place yesterday. 

Okun is alleged to be behind the 1031 exchange qualifed intermediary (QI) scam run by The 1031 Tax Group (1031TG) that defrauded thousands of people out of millions of dollars.

Okun was arrested last week in Miami, Florida, and charged yesterday by a federal grand jury in Richmond, Virginia, with one count of mail fraud, one count of bulk cash smuggling, and one count of false statements and forfeiture.

According to the indictment, from August 2005 through April 2007, Okun used 1031TG and its subsidiaries, all owned by Okun, in a scheme to defraud clients of millions of dollars through false pretenses.

The indictment alleges that 1031TG promised clients that their money would be used solely to effect 1031 exchange as outlined in the exchange agreements. Instead, Okun is alleged to have misappropriated approximately $132 million in client funds to support his lavish lifestyle, pay operating expenses for his various companies, invest in commercial real estate, and purchase additional qualified intermediary companies to obtain access to additional client funds.

The indictment also alleges that Okun instructed employees to withdraw $15,000 in cash from Investment Properties of America’s (IPofA) bank account, a company owned by Okun, and smuggle the cash to his personal yacht on Paradise Island in the Bahamas to avoid federal currency reporting requirements; and that Okun made material false statements under oath before the U.S. District Court for the Eastern District of Virginia relating to conversations he had with the chief legal officer of IPofA.

Federal prosecutors are seeking the forfeiture of all funds and assets owned by Okun that were derived from or connected to the misappropriation of approximately $132 million in funds held by 1031TG and of all funds and assets traceable to the $15,000 in cash he instructed to be smuggled to his yacht in the Bahamas.

If convicted of all the charges in the indictment, Okun will face a maximum of 30 years in prison and fines.

1031TG is only one of several QIs that have been in legal trouble in the past year, leaving investors with millions of dollars of losses.

The Federation of Exchange Accommodators, the qualified intermediaries’ industry-trade group, requires background checks of all members except those that are subsidiaries of publicly traded parent corporations. The FEA says it is working with the states and may reach out to federal regulators about enhancing oversight of the business. 

Especially in light of the erosion of investor confidence in the credit, banking, and mortgage industries, we think that oversight of 1031 exchange QIs is long overdue.

UPDATE:

For our post on the sale by a bankruptcy trustee of Okun’s West Oaks Mall in Houston, Texas, and Salina Central Mall in Salina, Kansas, click here.

Dos and Don’ts of a 1031 Exchange

Dos

Do make sure that a Section 1031 exchange is right for your tax situation and investment goals.

Do plan in advance.  Talk to your accountant, tax advisor, attorney, and real estate broker well in advance of beginning a Section 1031 exchange.

Do assemble your team of strategic partners in advance, including a qualified intermediary, an experienced and investment oriented real estate broker, and a tax advisor.  Perform due diligence in selecting an experienced and reputable qualified intermediary.  Make sure that your qualified intermediary is properly bonded and insured. 

Do get your books and past tax returns in order so that you know the adjusted basis on your relinquished property.

Do advise the buyer of your relinquished that you will be performing a Section 1031 exchange and contractually obligate them to cooperate in the exchange process.

Do perform due diligence on your replacement property — obtain a full title policy, historical cash flow, tax returns, leases, contracts, property conditions report, toxic waste analysis, demographics report, appraisal, tenant credit checks, and tenant estoppels.

Do know the basis of your replacement property. 

Do trade up, not down. 

Do avoid receiving “boot.”  In particular, make sure that any debt on the replacement property is equal to, or greater than, the debt on the relinquished property.

Do make sure that both the property you are relinquishing and the replacement property have been held for productive use in a trade or business or for investment.

Do make sure that the title to the replacement property will be held in the same manner as the your title on the relinquished property.

Don’ts

Don’t engage in a Section 1031 exchange without thorough planning well in advance of the exchange.

Don’t go it alone.  Before you embark on a Section 1031 exchange, put together your team of strategic partners, including an experienced, bonded, and insured qualified intermediary, an experienced and networked investment oriented real estate broker, and a tax advisor.

Don’t ignore or forget about the strict time limitations of 45 days for identification and 180 days to complete the exchange.

Don’t assume that you can do a Section 1031 exchange on property that is your personal residence.  You can’t.  But with proper advance planning, you can recharacterize a personal residence as an investment property and then exchange it under Section 1031.  If you have questions about whether your property could be considered your personal residence by the IRS, or if you want to recharacterize your personal residence and then do a Section 1031 exchange, make sure that you consult with your legal and tax advisors well before you attempt to initiate a Section 1031 exchange.

Don’t try to do an exchange on a property after you have sold it.  You cannot exchange property after you have sold it.  While this may seem too obvious to mention, many people make this mistake.  Real estate professionals are constantly hearing from people who say “I sold my property last month and I want to do a 1031 exchange.”  Don’t be one of them.  And remember, any receipt or legal control of the proceeds from the transfer of your relinquished property before you have obtained the replacement property will immediately turn the transaction into a taxable sale.

From 1031 Exchanges Made Simple, available at Amazon.com. 

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com

1031 Exchange Q and A: Can Developers Use 1031 Exchanges?

Here is another in our series of 1031 exchange questions and answers. 

This Q and A concerns “dealer’s property” and whether a developer can use a 1031 exchange.

Simon is the owner of “Ace Estates,” a real estate development business in Irvine, California.  He buys undeveloped land, hires architects and contractors, builds houses on the land, and then sells them to the public.

Felix has asked Simon whether he would be willing to do a Section 1031 exchange of one of Simon’s new houses for some land that Felix owns near Seattle, Washington.

Simon wants to expand his development projects, and he thinks that property values are still positive in the Seattle area.  He thinks Felix’s proposal is a great way to get a start in Seattle, and also legally avoid paying capital gains taxes on his profit from the house that Felix wants.

Can Simon exchange the house in Irvine for the land in Seattle under Section 1031?

Unfortunately, Simon cannot use any of the houses built and developed by Ace Estates for a Section 1031 exchange, because the IRS considers such properties to be inventory, intended primarily for sale, not business use or investment (known as “dealer’s property”).

Under Section 1031, inventory, stock in trade, or any other property that is held primarily for sale rather than business use or investment (“dealer’s property”) is disqualified from tax-free exchange.

Property is considered inventory when it is held for sale to customers in the ordinary course of business. For example, if you own a business that sells airplanes, then you cannot use one of those airplanes as qualified property in a Section 1031 exchange.

The dealer property exclusion rule also means that real property held for sale by dealers in real estate does not qualify for Section 1031 exchanges. Here, Simon is a dealer in real estate (he sells houses that he builds) and therefore can not use a 1031 exchange to transfer his inventory.

From 1031 Exchanges Made Simple, available at Amazon.com. 

To contact Melissa J. Fox about serving as a qualified intermediary or for other 1031 exchange services, send an email to strategicfox@gmail.com

The Battle Lines Have Formed in the Politics of the Credit and Mortgage Crisis

The battle lines have formed in the political fight over the federal government’s response to the credit and mortgage crisis.

There are now two clear, and clearly different, strategies being put forward as the federal government attempts to deal with the credit and mortgage crisis — or is it the real estate crisis, the housing crisis, the foreclosure crisis, the liquidity crisis, the international banking crisis, the securities crisis, or all of the above?

One strategy relies on persuasion (and the credit industry’s recognition of group self-interest) and the other on force (and the belief that without the threat of force, individual self-interest will trump group self-interest every time).

The persuasion strategy belongs to the Bush administration, including the President’s Working Group on Financial Markets, and a majority of the Republicans in the House and Senate.

Their basic approach is to use their bully pulpit, as well as some incentives, to attempt to persuade the banks, lenders, mortgage brokers, and others in the credit industry to regulate and reform themselves.

As Treasury Secretary Henry Paulson put it, the Bush administration and the President’s Working Group on Financial Markets (which includes, in addition to the Treasury Secretary, the heads of the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission) want “to not create a burden” on the players in the credit industry.

They’re hoping that the industry will see that their own self-interest requires them to take the actions that the administration suggests in order to restore confidence and stability in the credit market.

For the most part, the Working Group’s recommendations would not require legislation, but would be implemented by the credit industry itself.

As the New York Times testily observed, the administration’s program, announced with such fanfare today by Treasury Secretary Paulson, “amounted to little more than demands that investors and financial institutions take greater care in analyzing and managing their risks.”

On the other side of the aisle, and from a different ideological perspective, the Democrats are pushing an agenda that relies far more on the force of government imposed regulations and the concomitant threat of legal sanctions.

The Democrats’ thinking is premised on the belief that even with the credit market in crisis, and even with the general recognition within the credit industry that new rules are necessary for the good of the game, the individual players will adhere to these rules only when they are forced to do so by federal regulators with the threat of punishment.

The Democrats are probably also thinking that a “tough” approach to the banks and the brokers will play well with the voters.

What will happen — will the persuaders or the punishers win out in the end?

Our view is that in the short run — that is, until after the November elections — the persuaders will stand their ground, even in the face of election year attacks from the Democrats, and resist the increasingly insistent calls for unleashing an armed federal force against the credit industry.

If the financial crisis worsens significantly, we would then expect that the Republican persuaders will have to make more concessions regarding legislation and federal sanctions, although we would still expect that these will be minimal.

On the other hand, if the Democrats win in November, persuasion will be dead and war will be declared.  Force would be used against the financial markets and credit industry on a major scale.

We could then see a comprehensive and sweeping legislative overall of the entire credit and banking industry even more extenstive than the Securities and Exchange Act.