No business like 'Going Out of Business'

A Texas carpet shop changes its controversial name, but the haggling goes on and on. Now the store is advertising 'total liquidations.'

When Cyrus Hassankola moved to Dallas a couple of years ago, after successfully going out of business in several locales, he decided to settle down and go out of business permanently.

"The response was good from Day One," the carpet salesman says.

Customers rooting through the stacks of Oriental rugs in the store he opened on a busy road in North Dallas would sometimes say how sorry they were that he was going out of business. "We're not," Hassankola told them. "It's just the name of the store."

A business literally called Going Out of Business didn't sit well in some quarters, one of them the Texas Attorney General's Office. So Hassankola -- for a limited time only -- has stopped going out of business.

Now he's running regular "total liquidations" that "beat every going-out-of-business price." In his vocation, this is established practice. But the arrival of hard times has thrown the survival of the going-out-of-business model into doubt. Everybody else is slashing prices as if there's no tomorrow. Old-line going-out-of-business businesses are lost in the crowd.

• Talk back: What stores do you see closing in your area?

And their best customer -- the American trained to pay the advertised price -- has taken to haggling. America's Research Group, a South Carolina polling company, says 72% of 1,000 consumers interviewed in February had haggled in the past year (31% is the historical average), and they reported getting deals 80% of the time. Last year, only half the retailers they took a shot at caved in. Hassankola spots the trend whenever he rolls out a rug.

"That's pretty -- let's take it," a woman named Mary was saying to her husband, Jerry, on a Saturday afternoon in the store. They were studying a $4,200 hand-knotted carpet selling for $2,179. "I definitely don't like that price," said Jerry. Mary whispered, "See if he can make you happy."

Hassankola's helper, Hamid Moradi, tapped a calculator to set the "liquidation" price: $1,526. Jerry jiggled his keys. Moradi said, "Make it $1,000. If you love it, take it home." Jerry stared.

"I think you have to pay for it," Mary whispered. Jerry said, "No, we don't."

And they didn't. Moradi let them take the rug home, to see whether it matched their furniture.

As they left, Hassankola brimmed with optimism for a quick rebound in distressed sales. A slender man, 43 years old, he speaks with candor. "At last, they're bargaining," he said. "Now we must wake them up. Come back! Buy again! They think they're playing a game. I know. I'm part of this game. If I say no, I'm a liar."

Where Hassankola comes from -- Tehran -- the game is played without price tags, a style common in carpet bazaars from Delhi to Marrakech. In the West, an astronomical price tag is often a fiction; slashing it is a way to let buyers believe they're getting a discount. Price tag or not, the sellers are the ones who know where a rug comes from, how old it is, how good it is and how much it cost them.

Except for connoisseurs, most buyers know only what they "love." A seller can size up a buyer and decide what he's likely to pay. In business school, it's called "price discrimination." Hassankola has learned that lesson: He went to business school in Switzerland. When he finished, in 1991, he took a job in a Zurich rug warehouse.

The smell -- barnyard and mothballs -- stirred memories of his grandfather's rug store. That was all he knew of the trade, but he had studied the beauties of going bust. Zurich was known as a trading post for wealth escaping Iran in the guise of carpets, which were piling up in fixed-price shops. Hassankola hooked up with one of them, packed it with stock and advertised an emergency shutdown.

The place stayed open for months and "made tons of money," he says, adding: "If a store is closing forever, people believe they can squeeze you. It is the power of words."

Hassankola says he reprised his act in Zurich four times, then opened a store of his own there and went out of business in 1999.

In 2000, he flew to the U.S., found a green-card sponsor and hit the road. He recounts steering rug stores out of business in Maryland, Tennessee, South Carolina, North Carolina and Georgia. Tired of traveling, Hassankola moved to Dallas and in late 2007 opened his extended-stay rug store. When he registered its name as Going Out of Business, he doesn't recall any tax clerk or bank officer blinking. But when David Beasley caught sight of the sign, his eyes popped.

Beasley, 26, works for the Better Business Bureau. One recent morning, he was cruising around Dallas in his Chevy Cavalier on a preposterous-sales hunt. The banner on an apartment complex read, "Free rent." On a bedding showroom: "Nobody beats our prices." On a furniture outlet: "Bankruptcy liquidation."

"I understand the desire to stay in business," Beasley said as he drove along. "But you can't do it by going out of business."

Many localities do have rules against such claims. New York City asks stores to get licenses for angst-inspired specials, from "fire sale" to "lost our lease." Texas asks the same. But with blowouts on every corner, there's been no burst in enforcement. Texas has issued 49 such licenses since 2001 -- and prosecuted one used-car dealer in Austin.

Hassankola doubts Texas would have bugged him either, if Beasley hadn't gotten a TV station to show his shop's sign on the local news. When the Attorney General's Office phoned to scold him, he dropped his just-the-name-of-the-store routine without a peep and regrouped.

He replaced the sign with "Cyrus Rug Gallery," and, last fall, let fly with a flier: "Due to the impending demolition and redevelopment of our premises, we are forced to sell out at auction. Let our loss be your gain." The demolition crisis went on for months. The wreckers didn't arrive.

Lately, Hassankola has been hanging a "liquidation sale" banner out front. On a Saturday in June, he ran a four-page color ad in The Dallas Morning News pitching rugs at "60-90% off list." It was "first-come-first-served," but nobody came until 2 p.m. Only four sets of customers came at all. One couple paid $1,900 for a rug they wanted to use as a bathmat. It was the day's only sale.

Near closing time, Bill and Elaine Griffin walked in. "I'm ready to sell you rugs," Hassankola crooned. Elaine Griffin said, "I need an education." She got one, including the history of an 80-year-old, $29,000 rug going -- today only -- for $11,000.

"I am blessed," Hassankola told her. "My grandfather bought this rug."

Griffin folded her arms. "It looks brand-new to me," she said. As the couple headed for the door, Hassankola called out, "I have to tell you, this sale won't last much longer."

But Hassankola has more to come. He has heard that his building soon may finally be torn down. He's already scouting for new locations -- and making plans for a grand-opening sale.

Think recovery in year's second half

The bottom is in, so you should stick with stocks -- even if they pull back -- and lighten up on bonds. That's what I'm doing in my ETF portfolio.

Finally. For the first time in a year, the stock market has made money for a full quarter. And my model portfolio of exchange-traded funds did exceptionally well, spurting 13.5% in the second quarter.

Most of my positions racked up double-digit gains as they rebounded from the bear market bottom reached in the first quarter of 2009. The model trounced the performance of the stock market itself, as the Standard & Poor's 500 Index ($INX), represented by SPDR 500 Index Trust (SPY, news, msgs), advanced just 11.3%.

Despite this achievement, I'm going to substantially reorganize my portfolio for the months to come. I'm going to stay in stocks because, although we may see a brief pullback, the rebound has begun. I'll also cut back on bonds and dump gold until the inflation so many anticipate actually materializes.

If you agree with my outlook, you might plot a similar strategy.

The moves

Notably, I'm eliminating leverage from the domestic equity positions. The two-times ETFs I have owned, designed to rise twice as much as their benchmarks, performed decently in the quarter. But over the longer term, their results have been lousy.

Eliminating leverage decreases the effective weighting of equities within the portfolio, and I don't want to do that as the market finally moves up. So I'm also slashing my holdings of bonds. They have served me well in the bear market, but their outlook is not so promising. As the economy recovers from recession, interest rates will tend to rise, which takes the prices of bonds lower.

Finally, I'm selling gold. I added it three months ago as a hedge against inflation. No such prospect has arisen, and SPDR Gold Shares (GLD, news, msgs) has declined 0.6% in the past three months. Until the inflation threat becomes more concrete, I think gold is likely to wallow.

The leveraged letdown

The model finished the quarter with 9.6% of assets in ProShares Ultra S&P500 (SSO, news, msgs), 6.6% in ProShares Ultra MidCap400 (MVV, news, msgs) and 5.5% in ProShares Ultra SmallCap600 (SAA, news, msgs).

In each case, the fund is designed to deliver two times the performance of its benchmark, effectively doubling the weight of these allocations.

In the second quarter, these leveraged funds delivered on their promise pretty well, but it turns out that was happenstance. I had owned all three funds for six months, and in the first quarter they did much worse than promised. That was largely due to the extreme turbulence and downward trend in the first period, but the more favorable conditions in the second quarter did not erase the blot.

Can your lifestyle hurt your credit?

Lenders might be monitoring your behavior via your credit card spending -- and certain purchases could cost you

What you buy and where you shop may affect your credit scores.

As credit card companies continue to tighten their lending standards on card users, some are using purchasing data -- gleaned from millions of card transactions processed daily -- to weed out who may or may not be good credit risks.

Have you used your credit card at merchants specializing in secondhand clothing, retread tires, bail bond services, massages, casino gambling or betting? Your credit card issuer may be taking note -- and making decisions about your creditworthiness based on your purchasing behavior. Buying used clothing or retread tires, for example, may be an indication of financial distress and a preamble to missed credit card payments or defaults.

Now, Congress and federal regulators will probe the extent to which credit card issuers have used information about where a person shops or what they buy as reasons to lower credit limits or increase interest rates. When credit limits are lowered, it can adversely affect utilization ratios, which measure how much of cardholders' credit limits are used. Lowering credit limits increases the utilization ratio and can lead to lower credit scores.

New credit card law: Study this practice

The new credit card reform law signed by President Barack Obama in May includes a provision requiring federal regulators to investigate whether credit card issuers used information about where consumers shopped, what they purchased, the types of merchants they shopped with and their locations, and the mortgage company they borrowed from as bases for increasing interest rates or reducing credit limits.

"Where a person shops, in my opinion, has little bearing on whether they can pay back a credit card balance," U.S. Rep. Maxine Waters, D-Calif., said during an April 22 hearing on credit card reform conducted by the U.S. House Financial Services Committee. "I want this study done because I want to stop some of these outrageous practices in the future."

The Federal Reserve, the Federal Trade Commission and other banking regulators must report to the U.S. House and Senate financial-services and banking committees, respectively, detailing whether card issuers engaged in the practice between May 22, 2006, and May 22, 2009.

Regulators must also determine whether the profiling negatively affected minority and low-income card users. The Fed must make recommendations for any changes to existing rules or laws that may be necessary to curb harmful practices. Results of the study are due by next May 22.

Waters noted that American Express has already acknowledged it used information about where customers shopped to lower credit limits. After a firestorm of criticism and outrage earlier this year, AmEx announced it would no longer engage in the practice.

Is it redlining?

"I'm concerned that limiting credit based on where a person shops or the neighborhood they live in could amount to redlining," Waters said, referring to the practice of targeting certain areas or neighborhoods for discriminatory housing, insurance or lending treatment.

With credit card transactions, every time you make a purchase, a record of that sale is logged into a database of information collected by your credit card issuer. Privacy experts warn that consumers should be mindful of what they buy with plastic and what purchasing data credit card issuers may be analyzing.

Privacy questions

"Obviously that is something that most credit card holders are not going to think about," says Paul Stephens, the director of policy and advocacy for the Privacy Rights Clearinghouse, a San Diego privacy rights group. "They've obtained a credit card and think they can go out and use it in any way they like."

Experts say cardholders concerned about keeping purchasing habits private or avoiding credit score dings should consider using cash, gift cards or prepaid debit cards. Shopping at large supermarkets or wholesale clubs, which offer a variety of product lines, may also keep some purchases private. Other tips: Spread purchases that may indicate risky behavior over several credit cards to avoid triggering an alert for a single issuer.

"Cash is the ultimate privacy protector," Stephens says. "It's kind of hard to trace. With most other payment mechanisms, there is going to be a trail."

But avoiding credit cards for the sake of privacy may present a quandary for some users: If they had the cash to pay for items, they wouldn't need credit cards. For others, the convenience of using credit cards over other payment methods outweighs the potential privacy concerns.

Mining for data

Known in the industry by a number of terms, including behavioral modeling, data mining and psychographic behavior analysis, the practice of mining internal credit card issuer databases for customer spending trends and other patterns is not new. Issuers have been analyzing data perhaps since the first credit cards were issued.

Representatives from the four top credit card issuers -- Bank of America, Citi, Chase and Wells Fargo -- declined to discuss details of how they use purchasing data internally. Many consider this highly proprietary information. A spokeswoman from a banking industry trade group acknowledged the practice is common.

"The issuing bank has the date of transaction, name of the merchant and the amount of the transaction that allows them to process that transaction," says Nessa Feddis, a senior counsel and vice president of the American Bankers Association. She says specific information about items purchased (that you bought a gallon of milk, for example) is not included in the data transferred from the merchant.

"As a general rule, the specific transaction information is not transmitted to the issuing bank," Feddis says. "They are going to know where the person used the card."

Keeping track

Tracking is conducted for four primary reasons:

• Marketing. Issuers use past purchasing patterns as a basis for offering additional products. Someone purchasing airline tickets with a credit card may get offers of airline rewards credit cards or travel-related services from the issuer or an affiliate.

• Fraud detection. Credit card companies monitor spending to detect unusual purchasing habits that could be red flags for fraud.

• Risk management. Card users who continually go over their credit limits or exhibit unusual spending habits -- such as charging large amounts of merchandise on a card they had previously rarely used -- may be at greater risk of not paying their bills or filing for bankruptcy.

• Law enforcement. Remember that TV crime show where police tracked a missing person or a killer using credit card transaction data? Law enforcement agencies can subpoena records from both the credit card issuer and the merchant to find out the time, date and place of a credit card purchase -- information that may be helpful in determining the last known location of a crime victim or suspect. The Department of Homeland Security also tracks terrorist activity by monitoring certain purchases.

Massive databases of information

Millions of credit card users receive monthly statements detailing their spending during the billing cycles: The standard information provided includes the date of a purchase, the place of the purchase, including the name of the merchant, city, state, amount of the purchase and a transaction reference number.

Every transaction processed by the card networks (Visa and MasterCard) is assigned a merchant category code, a four-digit number that denotes the type of business providing a service or selling merchandise. The merchant category code for pawnshops, for example, is 5933. For dating and escort services, it's 7273, and for massage parlors, it's 7297.

The merchant category code is used, for example, to restrict health care spending on health-related credit and debit cards. Some health care flexible spending accounts allow users to make purchases only at pharmacies or merchants with medical-related services. Small business owners also use the codes to prevent employee abuse of company credit cards.

The merchant category codes, along with the names of the merchants, give credit card issuers a spyglass into cardholder spending.

'A pretty clear picture'

Stephens says the database's purchasing information can provide a pretty clear picture of credit card users. "What do they know about you? Depending on how extensively you use your credit card, they conceivably have a very clear, distinct picture of an individual. It's not only your retail purchases but your online purchases. It can really paint a very complete picture. The stores that you shop at can paint a picture. You also may use it at a doctor's office if you pay for care with a credit card. Some people pay for their utilities with credit cards."

Federal financial-privacy laws prohibit credit card issuers from sharing your personal and payment information with third parties not affiliated with the issuer (except under court order or when fraud is involved). Banks must send annual copies of their privacy policies to cardholders, but the law does not govern what the issuer does with payment information internally.

It is a common industry practice to analyze the data for trends. Several issuers offer cardholders annual summaries of their spending that categorize purchasing by type of merchant and amounts spent. This information can be a handy tool to help families budget for the coming year and determine where they can cut back spending.

"Once you use your credit card at a store, that code is tracked," says Steve Shaw, a strategic marketing manager for Fiserv, a company that develops online banking software to help financial institutions manage customer accounts. Shaw says banks are developing programs to track customer transactions and activities. The information is used to help make customer-specific offers of services. "A lot of financial institutions are trying to find more ways to generate revenue," Shaw says.

A rare glimpse into the details of behavioral modeling was revealed in a federal lawsuit filed by the Federal Trade Commission in June 2008 against subprime credit card marketer CompuCredit. According to the lawsuit, CompuCredit used an undisclosed behavioral scoring model to track customer purchases. The company lowered credit limits on cardholders who shopped at certain establishments or used certain services, including pawnshops, massage parlors, tire retread shops, marriage counselors, and bars and nightclubs.

CompuCredit agreed to a settlement that included crediting $114 million to the accounts of affected cardholders and paying a $2.4 million penalty. The company did not admit any wrongdoing in the settlement.

Risky behavior?

The recent credit crunch has placed greater emphasis on using the data to predict who may be a higher credit risk. Credit card issuers have said people living in states hard hit by foreclosures, such as Florida, Nevada and California, may be considered increased risks by virtue of the fact that they live there. People who shop at the same establishments where subprime borrowers shop also may be considered higher risk.

Feddis, the American Bankers Association spokeswoman, says decisions to cut credit limits based on customer behavior are based on evidence. "They don't want to risk a bad judgment that's going to lose a good customer. It's too hard to get a good customer," Feddis says. "They must have some sort of statistics that would demonstrate it's predictive -- to show that people who shop at pawnshops within six months stop paying their credit card bills."

Stephens, the privacy expert, warns of the potential fallout of using purchasing data. "One of the dangers of data mining is you're getting a little snippet of information that doesn't portray the full picture," he says. Does one purchase at a pawnshop signal a pattern of credit trouble? How many purchases qualify?

Stephens says issuers should make clear disclosures about how they use purchasing data. "We recognize that most consumers don't read privacy policies, but nonetheless, a company that is utilizing data in this fashion ought to make it quite clear that the purchase transaction history is being utilized for purposes other than billing . . . that they are using it to make re-pricing decisions as well as credit line adjustment decisions."

8 dividend stocks for a dull market

As the market rally slows, take a look at stocks that will keep paying even when their prices aren't rising. Here's a screen to help you find them.

With the rally in tech and other growth stocks losing steam, consider dividend-paying stocks to get you through the lull.

Because dividend stocks make regular cash payments to shareholders, you can score a worthwhile return even if the overall market goes nowhere.

When the market regains strength, your dividend stocks will likely move up as well. Thus you'll enjoy share price gains plus the steady dividend income.

I'm going to describe a stock screen for finding relatively low-risk dividend payers. Before I get into the details, you need to know how dividend-yield math works.

How yields add up

Dividend yield is analogous to the interest you receive on a bank savings account or certificate of deposit. It's the next 12 months' dividends divided by the price you pay for each share. For instance, the yield would be 10% if you paid $50 per share for a stock expected to pay dividends totaling $5 over the next year.

The dividend yield changes inversely to the share price. So, if the share price for the same stock moved up to $55, the yield to new investors would drop to 9.1%. (That's $5 in expected dividends divided by $55.)

Here's the flaw with the bank interest analogy: Unlike the interest you lock in on a bank CD, you can't lock in a dividend yield. There's no guarantee that a company won't cut its dividend payout while you hold the stock or that the stock won't drop in value. That makes dividend stocks riskier than federally insured bank CDs.

To compensate for the extra risk, my screen looks for stocks paying a minimum 3.75% yield, more or less double what you're likely to get from a bank these days. To minimize risk, the screen pinpoints relatively safe, low-debt, profitable companies. These are not out-of-favor value plays either. Passing stocks must be in favor with most market players, which, in my experience, makes them safer than out-of-favor stocks.

Here are the details.

Dividend yield

We'll start by limiting the field to stocks with expected yields of at least 3.75% and ruling out the riskiest dividend stocks: small companies and those paying abnormally high dividend yields.

Try raising your minimum to 4% if you want to limit your list to higher-yielding stocks.

Screening parameter: Current Dividend Yield >= 3.75

Yield too good to be true?

Because yields go up when share prices drop, many stocks with beaten-down share prices appear to be paying double-digit yields. Unfortunately, those abnormally high yields suggest that many market players expect a dividend cut. Whether those fears come to pass or not, double-digit yields signal high risk, which is what we're trying to avoid.

What's too high? Usually, yields of 8% and above would be enough to trigger a red flag. But because many stocks are still trading below normal levels, I allow stocks paying dividend yields up to 10%. Try reducing your maximum yield to 7% if you want to cut your risk or raising it to 15% if you want to throw caution to the winds.

Screening parameter: Current Dividend Yield <= 10

Avoid small caps
All else equal, large companies are safer bets than smaller companies. Bigger companies have the product diversity, experience and financial wherewithal to survive a tough economy. Market capitalization, which is the current value of all outstanding shares, is the best way to measure company size. To me, market caps below $2 billion define small caps, companies with market caps above $8 billion are large caps, and those in between are midcaps.

I rule out small-cap stocks by requiring a minimum $2 billion market cap. Try cutting that limit to $1 billion if you want to see more stocks.

Screening parameter: Market Capitalization >= 2,000,000,000

Next, we'll limit the field to fundamentally sound stocks that are highly profitable and carry relatively low debt.

Highly profitable

We'll measure profitability two ways: by checking the return on equity profitability ratio and by comparing a company's pretax profit margin to its industry.

Return on equity (net income divided by shareholder equity) measures how efficiently a company uses its assets to generate earnings. Many professional money managers avoid stocks with ROEs below 15%. But because this year has been a dud, I'm taking a longer view and require an average 15% over the past five years. Try reducing that figure to 12% if you want to see more stocks or raising it to 20% if you want to focus on only the most profitable companies.

Screening parameter: ROE: 5-Year Avg. >= 15

Profit margins
Profit margins measure the income earned per dollar of sales. For example, a 20% net profit means that a company earned 20 cents for each dollar of sales. In any given industry, the company with the highest margins takes home the most cash to develop products, increase dividends and do other good things.

Because companies may be paying different income tax rates, it's best to compare pretax profit margins. I require pretax margins at least 25% higher than the industry average.

Screening parameter: Pre-Tax Margin >= 1.25*Industry Average Net Profit Margin

Low debt
Given the uncertain credit markets, companies carrying little or no debt are safer than those with high debt. That said, requiring no debt would rule out most dividend-paying stocks. Also, the definition of low and high debt levels varies with the industry. Consequently, I allow moderate debt but limit the field to the lowest-debt stocks in each industry.

The debt-to-equity ratio, which compares debt with shareholder equity (a company's total assets minus liabilities), is a popular debt measure. A zero ratio indicates no debt, and the higher the ratio, the higher the debt. I set my maximum debt-to-equity ratio at 0.5, which equates to moderate debt.

Screening parameter: Debt to Equity Ratio <= 0.5 To confine the list to the lowest-debt stocks in each industry, I require debt-to-equity ratios no higher than 75% of the industry average. Screening parameter: Debt to Equity Ratio <= 0.75*Industry Average Debt to Equity Ratio Finally, we'll check institutional ownership, analysts' "buy" and "sell" ratings and each stock's own price action to confine our list to in-favor stocks. Check the smart money
Because they generate huge trading commissions, institutional buyers such as mutual funds are privy to better stock-moving information than individual investors. If they don't own a stock, you shouldn't either.

Institutional ownership, the percentage of a firm's shares held by these big players, ranges from 40% to 95% and sometimes even higher for in-favor stocks. I specify a minimum 40% institutional ownership.

Screening parameter: % Institutional Ownership >= 40
Analysts set market tone
Stock analysts advise whether to buy, sell or hold stocks that they follow. MSN Money compiles the ratings for each stock into these categories: "strong buy," "buy," "hold," "moderate sell" and "strong sell." Right or wrong, analyst ratings influence many investors. Thus any version of "sell" says the stock is out of favor.

Screening parameter: Mean Recommendation >= Hold
Stock price action
Relative strength measures a stock's return compared with the overall market. For example, relative strength of 90% means a stock has outperformed 90% of all stocks. Almost by definition, a stock must be outperforming the market to qualify as in favor.

I require a minimum 55% 12-month relative strength, which means that passing stocks must have outperformed a majority of stocks over the past 12 months.

Screening parameter: 12-Month Relative Strength >= 55
8 names worth a look
My screen turned up eight stocks when I ran it last week, all solid companies and major players in their industries. Click here to see which stocks the screen turns up today.

Search goes on for Madoff's money

As Mrs. Madoff relinquishes cash, furs and jewelry, a court-appointed trustee pursues more than $10 billion from investors who withdrew sums from Madoff accounts. 

Bernard Madoff ran his multibillion-dollar Ponzi scheme for at least 15 years. Some of his victims could be battling nearly that long to get their money back.

The court-appointed trustee of the defunct Madoff firm, attorney Irving Picard, has recovered just $1.2 billion of the $13.2 billion in estimated net losses sustained by investors since December 1995.

While eligible victims may get payments of up to $500,000 from the Securities Investor Protection Corp., set up to compensate investors for theft or proven unauthorized trading in brokerage accounts, the rest of their losses will be partially recouped from whatever assets Picard manages to gather in the liquidation process.

• Readers talk: Madoff's 150-year sentence

Last week, Madoff's wife, Ruth, agreed to a settlement with prosecutors in which she relinquished all the assets she shared with her husband. Mrs. Madoff will keep $2.5 million.

Mrs. Madoff gave up tens of millions in cash and securities as well as her $7.5 million interest in a New York City apartment and a $7 million Montauk, N.Y., property, and jewelry insured at more than $2.6 million. The agreement covers scores of items, including two fur coats valued at $48,500, $18,000 in linens and bedding, and $8,500 in silverware.

Prosecutors, the Securities and Exchange Commission and Picard's office are coordinating how to recover assets now considered tainted that were received by other Madoff family members and close associates, according to people familiar with the matter.

Much of Picard's take so far has come from liquidating Madoff's business. He recently sold Madoff's market-making operation for $25.5 million.

The investor kitty also includes $235 million from Banco Santander (STD, news,msgs). The Spanish bank, one of the largest conduits of investor money to Madoff's firm, Bernard L. Madoff Investment Securities, paid up to settle potential legal claims by Picard.

Most of what the trustee is expected to recover from now on will come from potential "clawback" suits against investors who pulled out money from the Madoff firm in recent years. Clawback suits in Ponzi schemes assert that recent redemptions were fraudulently obtained from other investors.

Bankruptcy law allows Picard to go after entities that received payments from the Madoff firm on or after Sept. 12, 2008, within 90 days of the bankruptcy filing. However, federal and state statutes are broader when it comes to recovering money that the courts deem to be fraudulently conveyed as part of the Ponzi scheme. Under New York state law, Picard could try to recover fictitious profits paid out within the last six years.

Picard already has sued to recover more than $10 billion from investors who withdrew sums from their Madoff accounts in recent years. The biggest targets include trust funds and partnerships run by investors Jeffry Picower and Stanley Chais, who collectively withdrew $6.1 billion over and above their principal investment with the Madoff firm, Picard has alleged. The men haven't formally responded to the suits. Their lawyers have said they were victims of the fraud.

Last week, Picard filed a lawsuit against Cohmad Securities, one of the firms that helped feed investors to Madoff. The suit seeks more than $100 million in commissions earned by Cohmad principals, who also were sued for civil fraud by the SEC.

He also is seeking more than $105 million in profits Cohmad employees and their families withdrew from the investment accounts they had with Madoff. Lawyers for Cohmad's principals deny any connection to the fraud.

Even as Picard gathers up assets, fights are brewing over how much will be paid out. Picard has said he intends to pay claims on a "net equity" basis, or the difference between what customers put in and what they took out.

SIPC has mailed out about $142 million in checks to eligible claimants, out of a total of $188.4 million that already has been approved. As the July 2 deadline for filing SIPC claims approaches, more than 10,000 claims have been filed. Many of those claims will likely be denied. Some people, such as those who invested with Madoff indirectly through feeder funds, probably won't be eligible for SIPC payments.

Many former Madoff customers want more. Some said their claims should be based on what was shown on their November 2008 account statements, which reflected balances of nearly $65 billion, before the fraud collapsed. Several investors have sued Picard over the matter. The suits are pending.

Realty fervor takes aim at reality

The real-estate balloon has deflated, but there's still plenty of hot air surrounding home prices. Let us now appraise industry lobbying efforts to lift valuations.

As the aftermath of the real-estate/credit bubble enters its second year, let's begin by devoting our attention to two key cogs in that wheel: the National Association of Realtors and the National Association of Mortgage Brokers.

For both organizations, the operative words are: long on bombast, short on shame.

Mark-to-fantasy still rules

Reacting last Tuesday to macro data near and dear to his heart, NAR Chief Economist Lawrence Yun made his own plea for what -- in Wall Street terms -- would be calledmark-to-model:

"Pending home sales indicated much stronger activity, but some contracts are falling through from faulty (my emphasis) valuations that keep buyers from getting a loan."

By "faulty," he meant: "Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales." (A slight variation is contained within a letter to members from the NAMB: "Appraisal Management Companies are assigning appraisers from a different municipality, county, or even state to appraise the target house. Therefore, unfamiliar with the neighborhood and unable to produce an accurate appraisal.")

In other words, we don't want these house prices marked to the last sale. We want them marked to where we think they ought to be marked.

Yun continued: "In the past month, stories of appraisal problems have been snowballing from across the country, with many contracts falling through at the last moment. There's the danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected."

Honest appraisals: Not in my backyard

That pathetic little threat didn't cut it for Barry Ritholtz (the author of "Bailout Nation," among his other talents), who, in an e-mail to me, summed up the situation:

"I did some more digging, and I quickly discovered what this contemptible suggestion was all about: It is part of a broader lobbying effort by the National Association of Mortgage Brokers (NAMB) and the NAR against honest appraisals. For more proof of this lobbying effort, see the letters to mortgage brokers and real estate agents from their trade associations to mobilize against mandating honest appraisals."

(Ritholtz has posted both the mortgage brokers letter and the Realtors letter on his Web site.)

So, in the wake of the greatest credit/real-estate bubble the world has ever seen, we get this: On the one hand, the powers that be decide they really don't want to utilize mark-to-market accounting in the financial system. On the other, those at the epicenter of the real-estate bubble itself are advocating the use of appraisers who will come up with the "right" number rather than a realistic evaluation.

Funds to profit from falling dollar

Long term, the greenback is headed down. Insulate your wealth against its decline with the right mutual funds.

Take it from Wayne Gretzky: In your portfolio, as in hockey, you want to skate to where the puck is going, not to where it's been. So even though the U.S. dollar has moved higher over the past year, you should follow the economic clues that point in the opposite direction: down.

The hefty U.S. current-account deficit, which clocked in at $673 billion in 2008, tells much of the story. That figure represents the difference between what the U.S. pays other countries for goods, services and income from investments, and what it receives from other countries.

As Axel Merk, chief investment officer and president of Merk Investments, explains, the gap implies that foreign investors have to purchase about $2 billion of dollar-denominated assets every day just to keep the dollar from falling.

Foreigners gladly snapped up dollar-denominated assets, particularly Treasury billsand bonds, in late 2008 and early 2009, when financial Armageddon loomed. The dollar is, after all, still the world's reserve currency and is considered highly safe. That flight to safety fueled a 25% rise in the value of the greenback measured against a basket of developed-market currencies over the year that ended March 5.

But now that Armageddon is off the table, foreign investors have reversed course. In April, foreign governments bought a net $8.3 billion of U.S. Treasury securities, down from $50.5 billion the month before. In total, foreign investors sold a net $53.2 billion of dollar-denominated securities in April.

This trend will continue even if the dollar retains its status as the world's reserve currency. As bond guru Bill Gross, chief investment officer of Pimco, wrote in a recent commentary on his firm's Web site, "Holders of dollars should diversify their own (currency) baskets before central banks and sovereign wealth funds ultimately do the same."

This does not mean you should move your retirement savings into the Chinese renminbi. After all, you probably earn and spend most of your money in dollars.

But diversifying the portion of your portfolio you keep in bonds or cash with a fund that benefits from a falling dollar could make you some money -- and provide disaster insurance against the unlikely scenario of a dollar crash.

One ETF, 3 mutual funds

PowerShares DB U.S. Dollar Index Bearish (UDN, news, msgs) is a good choice for a simple, low-cost hedge. The exchange-traded fund is designed to go up when the U.S. dollar index -- which measures the dollar against a basket of six developed-market currencies -- goes down. The fund, which achieves its objectives by selling short currency-index futures, charges annual expenses of 0.5%.

But there's something to be said for letting a warm body pick currencies for you. Axel Merk has an excellent record of doing so in Merk Hard Currency (MERKX). From the fund's inception in May 2005 through June 17, it has gained an average 5.6% per year. During the same period, the inverse of the U.S. dollar index gained 1.2% a year.

Merk crafts the fund with the specific aim of hedging the U.S. dollar. He'll invest in short-term money-market securities to play currencies he likes."We try to avoid interest-rate risk and credit risk," he says.

Recently, he also had 14% of the portfolio stashed in gold. Merk likes the Norwegian krone because of that country's healthy economy, and he favors the Canadian and Australian dollars as beneficiaries of rising oil prices. The fund charges 1.3% in annual expenses.

For a bit more oomph, you could invest in T. Rowe Price International Bond(RPIBX), which buys longer-maturity issues than Merk's fund does and skips the gold exposure. Manager Ian Kelson invests predominantly in developed-market government debt; that results in a high-quality portfolio, with an average credit rating of double-A.

Like Merk, Kelson is bullish on the krone. He's cautious on the euro in the short run, but likes it longer term simply because "it's a realistic alternative to the dollar" for investors and foreign governments looking to diversify their dollar holdings. He thinks the British pound is attractive for its cheapness relative to other currencies, despite severe economic problems in the U.K. Over the past 10 years through June 17, the fund produced an annual average return of 5.4%. It charges 0.81% in annual expenses and recently yielded 2.8%.

Loomis Sayles Global Bond (LSGLX) offers the most corporate-bond exposure and the highest yield of the bunch. Corporates recently accounted for more than half of the fund's assets, with the rest stashed in debt guaranteed by assorted governments. However, as a global product, the fund invests about 40% of its assets in dollar-denominated securities, so it isn't a pure play on a weak buck.

Co-manager David Rolley says he and co-managers Kenneth Buntrock and Lynda Schweitzer manage the fund relative to the Barclays Capital Global Aggregate Bond Index, which is "designed to show the performance of all investment-grade bonds, all over the world."

The index provides managers a fallback "neutral" currency allocation they can use if they're not sure about the direction of a currency, but they're not wedded to the index when they feel strongly about a position. Over the past 10 years, this approach has returned 6.2% annualized. The fund sports a current yield of 5.1%.

Bumpy road for the greenback

For now, the team is in wait-and-see mode. Rolley is also bullish on the krone and mildly bullish on the euro. He thinks the rally in currencies of countries with big energy holdings, such as the Australian dollar and the Brazilian real, has gotten ahead of itself, so he's waiting for a pullback before stashing more money in those areas.

Rolley predicts that the dollar's journey will be bumpy. After all, he says, at some point the Federal Reserve will have to start raising short-term interest rates -- a textbook driver of currency appreciation. When that happens "investors are going to freak out and say, 'Oh my God, why are we short the dollar?'"

That should spark short-term rallies along the road of the dollar's longer-term decline. The Loomis Sayles fund charges 1% in annual expenses.

Your 5-minute guide to protecting your identity

Here are 22 steps to protect yourself from identity theft -- and 8 ways to clean up things if you become a victim.

Thieves may sell your information on the black market or use it to obtain money, credit or even expensive medical procedures. Unless you're vigilant in protecting your records, you'll have to work even harder to repair the damage to your credit. The average victim spends 30 to 40 hours rectifying the problem.

Some of the e-threats to your identity are:

• Phishing. You get an e-mail that appears to be from your bank or an online service, most often PayPal or eBay, instructing you to click on a link and provide information to verify your account.

• Pharming or spoofing. Hackers redirect a legitimate Web site's traffic to an impostor site, where you'll be asked to provide confidential information. Scammers have been targeting social networking sites, such as Facebook.

• Smishing. This is phishing done with text messaging on your smart phone. It instructs you to visit a bogus Web site.

• Spyware. You've unknowingly downloaded illicit software when you've opened an attachment, clicked on a pop-up or downloaded a song or a game. Criminals can use spyware to record your keystrokes and obtain credit card numbers, bank-account information and passwords when you make purchases or conduct other business online. They also can access confidential information on your hard drive.

You don't need to have a computer to become a victim.

• Vishing -- voice phishing. You get an automated phone message asking you to call your bank or credit card company. Even your caller ID is fooled. You call the number and are asked to punch in your account number, PIN or other personal information. (See "Your phone may be under attack.")

• Bank-card "skimming." Crooks use a combination of a fake ATM slot and cameras to record your account information and PIN when you use a cash machine. Your credit or debit card also can be skimmed by a dishonest store or restaurant worker armed with a portable card reader. (See "Is your waiter a thief?")

• Crooks will steal your wallet or go through your mail or trash.

More than half of identity theft cases involve credit card fraud. Checking accounts are the second most popular target. But some crooks have other plans:

• At least 250,000 people a year have been victims of medical identity theft for the last several years. (See "Diagnosis: Identity theft.") Crooks use fraudulently obtained personal information to get expensive medical procedures or dupe insurance companies into paying for procedures that were not done.

• The victims of about 5% of reported identity theft cases are children. The fraud often goes undetected for years -- until the young adult applies for credit. (See "Stolen innocence: Child identity theft.") Even the dead aren't safe. (See the video "R.I.P. Identity Theft.")

22 tips to protect yourself

You can take steps to protect yourself from identity fraud:

• Keep your confidential information private. Your bank or credit card company won't call or e-mail to ask for your account information. They already have it.

• Keep an inventory of everything in your wallet and your PDA, including account numbers. Don't keep your Social Security card or any card with your Social Security number, such as an insurance card, in your wallet.

• Order and review your credit report. You are allowed one free report each year from each of the three major credit agencies. Order reports here; it is the only place to get them for free.

• Stop getting banking and credit card information in the mail. (See "Go paperless for safer banking.")

• Monitor your bank and credit card transactions for unauthorized use. Crooks with your account numbers usually start small to see if you'll notice. The sooner you catch them, the easier the problems are to clear up.

• Keep your vehicle registration and insurance forms in a sealed envelope in your glove box and lock it and your car when at home or away.

• If you conduct business online, use your own computer. A public computer is less secure, as is wireless Internet.

• Look for suspicious devices and don't let anyone stand nearby when you use an ATM. Take your card and receipt with you. Keep your PIN in your head, not in your wallet.

• Don't store credit card numbers and other financial information on your cell phone. (See "Is your cell phone spilling your secrets?")

• If you're job hunting using résumé Web sites, don't apply unless the employer has a verifiable address.

• Once you no longer need to store them, shred any bills or statements that have your personal information on them. (See "Purge your financial paperwork.")

Protect your computer from vulnerability:

• Keep system and browser software up to date and set to the highest security level you can tolerate. Install antivirus, antispyware and firewall protection, and keep them up to date as well. When possible, use hardware firewalls, often available through your broadband connection router.

• If you use wireless Internet access, make sure you get help from someone who understands wireless security when you set up your access point or router.

• Back up your data and store it way from your computer.

• Don't open e-mails from strangers. Malware can be hidden in embedded attachments and graphics files.

• Don't open attachments unless you know who sent them and what they contain. Never open executable attachments. Configure Windows so that the file extensions of known file types are not hidden.

• Don't click on pop-ups. Configure Windows or your Web browser to block them.

• Don't provide your credit card number online unless you are making a purchase from a Web site you trust. Reputable sites will always direct you to a secure page with a URL starting withhttps:// whenever you actually make purchases or are asked to provide confidential information.

• Use strong passwords: at least six characters, including at least one symbol and number, and no reference to your name or other personal information. Use a different password for every site that requires one, and change passwords regularly.

• Never send a user name, password or other confidential information via e-mail.

• Consider turning off your computer when you're not using it or at least putting it in standby mode.

• Don't keep passwords, tax returns or other financial information on your hard drive.

8 steps to clean up the mess

If you suspect your identity may be compromised, place a fraud alert with the three credit bureaus. When you place an alert, you are entitled to a free copy of your credit report. After that, take advantage of the free annual reports the bureaus are required to give all consumers. Stagger your requests so that you get a report every four months. Beware: A fraud alert applies only when someone tries to open a new line of credit. It won’t keep someone from using existing accounts.

• If you've been phished, contact the real bank or other company named in the fraudulent e-mail. You also may want to notify the Internet Crime Complaint Center and forward the e-mail to spam@uce.gov.

If you are the victim of identity theft, take the following steps:

• Make an identity-theft report to the police. File a complaint with the Federal Trade Commission. Also, contact the office of your state's attorney general; you may be able to file a report there. Get copies of all this paperwork and keep them in a safe place.

• Close accounts that have been tampered with. Contact each company by phone and again by certified letter. Make sure the company notifies you in writing that the disputed charges have been erased. Document each conversation and keep all records.

• Place a seven-year fraud alert or a "freeze" on your credit reports. (See "Lock your credit away from ID thieves.")

• Begin the process of having the fraudulent information removed from your credit reports. (See "Don't let credit-report errors fester.")

• Consider purchasing identity theft insurance. It cannot protect you from becoming a victim of identity theft, but it can help you pay the cost of reclaiming your financial identity. Be wary ofidentity theft protection services; the Consumer Federation of America has found they may not be worth the cost.
• Find victim support at the Identity Theft Resource Center.
• If you are the victim of medical identity theft, avail yourself of the helpful information provided by the World Privacy Forum.

Escape a debt, face the IRS

Congratulations. You just talked a lender into reducing or canceling a troublesome debt. The bad news? Now you may have a tax problem.

Did you get a credit card company to reduce your debt or even cancel it? Good for you. It's a huge relief for you and your family.

But don't congratulate yourself for too long. You may have a created a second problem that needs some careful planning. The amount of the debt reduction is taxable income, and you will owe money to the Internal Revenue Service.

Sorry, but that's the rule -- generally speaking. There are exceptions to the rule, and we'll get to those.

The problem begins with what, until very recently, was the a great credit environment for borrowers. Banks were begging you to take their money (very few still are).

If you couldn't qualify for a fixed-rate loan, you'd probably be offered an adjustable-rate loan, even now. And if you don't have enough cash for a 20% down payment, you can still get private mortgage insurance and go without.

In fact, if you take out a new mortgage with PMI, you may even be able to deduct the monthly premium from your income taxes.

As for credit cards, it was ridiculous. All three of my grandchildren were offered gold cards before their first birthdays. The banks were giving them away like prizes in a Cracker Jack box. I filled out applications for my dog and cat, and it turns out even they can get credit cards.

Or could until the credit crunch hit. In fact, with credit so easy, it's no wonder so many people got in trouble. And fell behind on their mortgages and credit cards. Many people are so far behind they'll never catch up. Many, in fact, have just stopped paying.

A lender's deal will have a nasty bite

Fact is, your creditors really aren't your friends. But they understand that if you don't have any assets and have minimal cash flow, there's very little they can do. We don't have debtor prisons. In many cases, creditors almost automatically turn your account over to professional collectors, who get paid based on what they collect.

This gives you two opportunities to resolve your problem by paying less than the full amount of your debt. In both cases -- with the original creditor and with the collector -- they're willing to take whatever cash they can get.

I don't have a problem with cutting a deal with a creditor, but you have to know what you're getting into.

Based on your individual situation, you can offer to pay, say, 10% of what's owed. Your creditor probably won't take your first offer, so start low, but within reason. It's really a function of your cash flow and your assets. You can always increase your offer, but you really can't go down.

Explain where you'd get the money -- say, from a relative. But make sure the creditor recognizes there is a limit to how much you can borrow. Bank money is out of the question, because you failed to stay current on your debt.

The shock of the tax problem

Eventually, you'll get a deal. It may cost you your house and your credit score, but they can't get blood out of a stone. Part of your debt is going to get written off.

Swell, you say. You exhale a sigh of relief . . . until tax time.

That's when your former creditor sends you a Form 1099-C (.pdf file) showing the amount of debt relief. Your ex-creditor also sends a copy to the IRS.

Unfortunately, those rascals in Washington expect you to pay tax on the amount of that debt relief. It's other income, reported on line 21 of your 2009 federal Form 1040 (.pdf file).

Say you file jointly and have a taxable income (before the additional debt relief income) of $67,900. You're in the 25% bracket. If you settled a $20,000 liability for $10,000, that gives you $10,000 in additional income. Those additional dollars will be taxed at a rate no lower than 25%, with some subject to a 28% hit. Add state taxes, and they're reaching into your pocket for an additional $3,000 in taxes.

You couldn't afford to pay the minimum on your credit cards. Now the IRS wants a check for what you were grossing in total over the last six months.

Now here are the exceptions to this scenario. The first is really important.

Until December 2006, if your mortgage lender forgave, say, $100,000 of a $200,000 loan, you would be required to report that forgiveness as income. That would have caused astounding amounts of hardship for some people.

Congress decided that was too much. In late 2007, our lawmakers decided that debt forgiveness on your primary residence, up to a $2 million ceiling, escapes taxation for 2007, 2008 and 2009. So, if you had a $200,000 mortgage, and your lender agreed to forgive $100,000 of the balance, you won't have to pay any tax on the $100,000.

And there are other ways the debt-relief amount may be free of taxes.

The IRS isn't completely without a heart. There's a special provision that made discharged debt tax free to some victims of Hurricane Katrina. You also don't recognize income from debt forgiveness if you were the victim of a terrorist attack.

For those who don't qualify, there's another escape hatch. If the debt was discharged as part of a filed bankruptcy, then there's no income.

What if you didn't even have the cash flow to file a bankruptcy petition? If you were "insolvent" immediately prior to the debt discharge, you may also escape taxation on the debt relief. You're "insolvent" if your liabilities exceed your assets.

But -- and this is a big but -- this exclusion is limited to the amount by which you are insolvent. Say you have $50,000 in assets and $70,000 in liabilities. You're insolvent to the extent of $20,000. So if you have $30,000 in debt relief, $10,000 is still going to be taxable.

That brings to the installment agreement or the offer in compromise.

The IRS may cut a deal

This is a potentially painful dilemma. If you don't have the cash, you have two options:

• An installment agreement: This is an agreement to pay the tax bill over an agreed-upon time. You apply for that on Form 9465 (.pdf file). You will pay interest (currently 8%) on this agreement, but it's cheaper than the rate on a credit card.

• An offer in compromise: You apply for that on Form 656 (.pdf file). This is an agreement between you and the IRS that resolves your tax debt. The IRS has the authority to settle tax liabilities by accepting less than full payment under certain circumstances. A warning, however. The IRS is, frankly, very stingy on agreeing to these.