Claims And Issues

Financial Failure Fallout Hurts All Investors, Including Insurance Companies.

    A new round of defaults is reportedly anticipated from developers and builders engaged in Commercial Real Estate.  See, e.g., Heather Landy and Dana Hedgpeth, "Crisis Hits Values of Commercial Mortgages" (Washington Post.com, Thursday, November 20, 2008); Neil Irwin and Renae Merle, "Financial System Suffers Relapse" (Washington Post.com, Friday, November 21, 2008). 

    This would hit Insurance Companies hard.  Insurance Companies historically have provided much of the financing to Commercial Real Estate developers and builders.  Steven Pearlstein, "Hank Didn't Start the Fire" (Washington Post.com, Friday, November 21, 2008).

Please Read The Disclaimer.

Better Ways Than Bond Insurance? Credit Ratings May Drive Diversification.

    Moody's investors Service has recently done an incredible thing in many ways.  In downgrading the Credit Ratings of two (2) Bond Insurance Companies that compete with a Bond Insurance Company owned by Moody's parent, Berkshire Hathaway, Moody's analysts reportedly wrote something astonishing.

    They reportedly wrote that the business model behind Bond Insurance no longer exists.  This is what they said:  "'The downgrades primarily reflect Moody's view that the business model of financial guaranty insurance has been damaged over the past year due to sustained turmoil in credit markets and the very poor performance exhibited by a number of guarantors.'"  Quoted in Jody Shenn, "Assured, FSA Stripped of Aaa Ratings by Moody's (Update 1)" (Bloomberg.com, Friday, November 21, 2008).

    Further, the Moody's analysts expressed their view that from now on it will be "'quite challenging'" for a guarantor of only municipal debt to get or keep a Aaa Credit Rating from Moody's.  Id.

    This is perhaps also a belated recognition of reality:  The Bond Insurance market was made only three (3) decades or so ago by financial manipulators and not in response to a real need for Insurance, or guarantees, of municipal bonds ("munis").

Please Read The Disclaimer.

UPDATE 1 to Bank Bailouts, Bond Insurance, and a Better Way.

    It was previously posted in this space that, among other things, Dexia sold Bond Insurance Company Financial Security Assurance ("FSA") to Bond Insurance Company Assured Guaranty Ltd.  It is now reported that Moody's Investors Service has reduced the Credit Ratings of both FSA and Assured below the point at which either can successfully issue Bond Insurance Policies.  See Jody Shenn, "Assured, FSA Stripped of Aaa Ratings by Moody's (Update 1)" (Bloomberg.com, Friday, November 21, 2008).

    After these two downgrades, Moody's rates the Credit of only one (1) Bond Insurance Company at a level high enough to write Bond Insurance if the past is any guide:  Berkshire Hathaway Assurance Corp.  See id.

    Berkshire Hathaway is heavily invested in Moody's Investors Service.

    Assured and FSA now  join MBIA, Ambac and three other Bond Insurance Companies which used to have Credit Ratings by Moody's high enough to write -- and collect Premiums, of course, for writing -- Bond Insurance Policies, but are likely no longer rated high enough by Moody's to effectively compete with Berkshire Hathway Assurance Corp. in the Bond Insurance arena.  See id.

Please Read The Disclaimer.

    

Risk Management Once Was Lost, But Now Has Been Found ....

.... Perhaps.  

    What are the causes of the financial failure across the planet?  Relying on outliers like Credit Rating Companies to assess risk in the financial services sector is a recurring observation made by regulators.  See Eric Dash and Julie Creswell, "Citigroup Pays For a Rush to Risk/Bank Saw no Red Flags Even as it Made Bolder Bets" p. 1, col. 2 (New York Times Nat'l Ed., Sunday, November 23, 2008).

    Large commercial banks and large Insurance Groups and Insurance Companies hold themselves out as specialists in rating risks.  They tell their potential and existing customrers that they are experts in risk management.  The current head of the Office of the Comptroller of the Currency, has this to say:  "'There is really no excuse for institutions that specialize in credit risk assessment, like large commercial banks, to rely solely on credit ratings in assessing credit risk.'"  John C. Dugan, quoted in id.

    Self-interest management replaced risk management, it seems clear.  Another quote in the linked newspaper report comes from an anonymous source who reportedly worked with Collateralized Debt Obligations at Citigroup:  "'I just think senior managers got addicted to the revenues and arrogant about the risks they were running.  As long as you could grow revenues, you could keep your bonus growing."

  Drawing from the comprehensive linked newspaper article, here are some of the reported behaviors in the financial services sector in recent years that have not matched settled principles of risk managment:

        Allowing or overlooking, and in any case ignoring, potential conflicts of interest on the part of the risk managers;

        Apparent lack of independence of the risk managers from the marketers or traders;

        Instructions from superiors of both risk managers and sales persons to increase marketing of financial instruments that may become profitable in the short term but never become well known except in the long term, such as collateralized debt obligations or C.D.O.'s;

        Lack of clear lines of reporting, such that risk managers report to a person who is in charge of the people marketing or trading the same products that the risk managers are supposed to keep an eye on.

A related post can be found on www.insuranceclaimsbadfaith.typepad.com.

Please Read The Disclaimer.

        

Bailing Out "Banks": "Banks" Get Help, People Don't.

    The Emergency Economic Stabilization Act of 2008 does not seem to be limited to banks.   Link to the Act here and take a look for yourself.  That is also what many -- if not all -- Members of Congress who voted for the Act have to say about  their intent in enacting the Act.

    The current Treasury Department has narrowly interpreted the help mandated by the Act, however.  Treasury will dispense Taxpayer Funds only to "banks" (whether the banks are solvent, or not, according to uncontradicted newspaper reports of how the Funds have been dispensed by the present Treasury Department).  Treasury's rule on "banks," which can include savings and loans, apparently extends to companies that have subsidiaries that qualify as "banks" and perhaps to companies that want to receive the Taxpayer Funds and so be called "banks".

    Several panicked Life Insurance Companies reportedly are trying to qualify as "banks" now in order to receive the Taxpayer Funds.  These include Hartford Financial Services Group, Transamerica (parent corporation:  Aegon), Lincoln Financial Group, the Phoenix Companies, and Genworth Financial.  Principal Financial Group already owns a bank and it has announced that it, too, is applying for the Federal Taxpayer Funds.  David S. Hilzenrath, "Insurers Seek to Buy Thrifts to Get Piece of Bailout"  (Washington Post.com, Friday, November 21, 2008).

    Mutual of Omaha and State Farm, however have announced that they have absolutely no plans to apply for the Federal Taxpayer Funds.  Id.

Please Read The Disclaimer.

Failure Has Consequences, But Not Today at Notre Dame.

    Notre Dame lost again.  They lost on November 22, 2008 to a team that previously won two games in 2008.  For the fourth time so far in 2008, the Fighting Irish football team gave up a lead in double digits and ended up losing the game.  They lost at home.  It was Senior Day at Notre Dame.  College Roundup, "Syracuse Stuns Notre Dame, Ending Ugly Day for the Irish" p. 5, col. 2 (Associated Press copyrighted report published in the New York Times National Edition, Sports Section, Sunday, November 23, 2008).

    The Fighting Irish 2008 football season record is 6-5.  Their 2007 season record was 3-9.  This coming weekend, the football team's opponent is U.S.C.  Jeff Carroll, "Weis' Time Just About Up" (South Bend Tribune, Sunday, November 23, 2008).

  The current head coach, Mr. Charlie Weis, has a 28-20 won-loss record in his fourth year with the Notre Dame football team.   That is a won-loss percentage of  58.3%.

    Charlie Weis has the same winning percentage that Bob Davie had when he was fired after five years.

    He also matches the identical winning percentage that Tyrone Willingham achieved until he was fired in his third year as head coach of the Notre Dame football team.

    Mr. Weis holds a ten-year contract.  Syracuse Stuns Notre Dame, Ending Ugly Day for the Irish, supra.

    Whether Charlie Weis hangs on to his current job or not, who is responsible for hiring Mr. Weis in the first place?  Beyond that, who is responsible for firing his predecessor, Tyrone Willingham, whose winning percentage was precisely the same after only three years as Charlie Weis' is right now after four years?

    At the time that Mr. Willingham was fired, the Notre Dame student newspaper identified the persons who apparently made this decision.  The Observer reported that since 1964, no Notre Dame head football coach had been given less than 5 years in the position.  That report is available through the University of Notre Dame web site, at least at the time of this post.  Matt Lozar, "Jenkins Replacing Malloy Not the Only Change" "Posted:  4/27/05".

    Of the reported participants in the decision to fire Mr. Wilingham in late November, 2004, four are still active in the running of the University of Notre Dame:  Rev., John I. Jenkins, CSC, then the incoming President and still the current President of the University; John F. Affleck-Graves, Ph.D; Patrick F. McCartan, Esquire; and Philip J. Purcell III.  The status of Father Jenkins has already been noted.

    The only reported connection with athletics among any of the surviving participants is that one of the four donated $12,500,000.00 to build a bigger basketball arena at Notre Dame.  Otherwise, they appear to possibly know more about the causes of the financial failure across the globe right now, than they have ever known about football failure, if anything. 

    During the presidency of Father Jenkins, Dr. Affleck-Graves has been the Executive Vice President.  In fact, he is the first layperson to hold that position at the University of Notre Dame.  His academic background is in finance and business economics.  He is experienced in consulting for many corporations, particularly drug companies.  His biography on the University of Notre Dame web site does not reveal any connection with athletics.

    Patrick McCartan, Esquire chaired the Notre Dame Board of Trustees in 2004 when Tyrone Willingham was fired.  He is still on the Board, as "Chairman Emeritus".  He is a partner at a large international law firm, Jones Day.  He represented parties who successfully sued to enjoin a gasoline tax during the Carter Administration, and he successfully represented Ronald Reagan in keeping $29 Million in Federal Taxpayer Funds.  According to a 2007 Press Release from the University of Notre Dame, Mr. McCartan concentrates on matters of corporate governance, among other things.  The Notre Dame Press Release last year did not reveal any connection with athletics.

    Finally, at the time that the decision was made to fire Tyrone Willingham, Philip Purcell was soon to lose his own job.  He is the former chair and CEO of Morgan Stanley.  In 2005, reports the New York Times, "the company was demoralized after a controversial merger with retail brokerage firm Dean Witter."  New York Times, Business - Companies - Morgan Stanley, published Sunday, November 23, 2008.  Mr. Purcell was instrumental in the merger between Morgan and Dean Witter.  Dean Witter no longer exists, parenthetically.

    In early 2005, Mr. Purcell was forced out at the behest of a group of Morgan Stanley shareholders.   In exchange for his departure, he received some $44 Million.  David Wighton and David Wells, "Purcell Gets $44m for Leaving Morgan Stanley" (Financial Times, July 8, 2005).  In 2007, he told the Financial Times:  "'Will private equity continue to outperform public markets?  Is this good for the economy?', asks Mr Purcell, 'In both cases the answer is yes ....'"  Markets/Ask The Expert, "Private Equity" (FT.com, March 7, 2007).

    On the date of this post, Mr. Purcell's entry in Wikipedia carries the warning that the entry is  like an advertisement and it cites no sources.  The entry states:  "In October 2006, Purcell contributed $12.5 million for the construction of a new basketball pavilion at Notre Dame."

    These are the people who made the decision to fire Mr. Willingham, and they are apparently also the same people who failed not once but two times, when they decided, first, to hire Mr. Weis and, second, when they decided to give Mr. Weis a contract 10 years long.  They say that failure has consequences.  The next game is U.S.C.  Failure may have consequences, but not today at Notre Dame. 

May God help Notre Dame, for these people have failed her greatly.

Bank Bailouts, Bond Insurance and a Better Way.

    News of significantly vast potential to achieiving a successful combination of "Bank Bailout" using Taxpayer Money, coupled with Private Capital Injection, has surfaced very recently:   Jody Shenn and Fabio Benedetti-Valentini, "Assured Guaranty to Buy Dexia's FSA Bond Insurer (Update 4)" (Bloomberg.com, Friday, November 14, 2008).  In this seemingly arcane report of business dealings, a report seemingly without meaning except to the companies involved, a way is shown to achieve success where success has not been achieved by the current U.S. Treasury Department and Federal Reserve.  It took a combination of Taxpayer Funds and a new CEO who reportedly is interested in reducing risk of the kind associated with the worldwide financial failure rather than, say, obtaining a new installment of more Taxpayer Funds.

    Dexia SA is a bank.  It is reportedly the largest lending institution to local governments in the world.  In September, 2008, Dexia received a "lifeline" or bailout from the governments of France, Belgium and Luxembourg to avoid its own collapse following the bankruptcy filing of Lehman Brothers in that month.  The bailout is reported in the linked newspaper article as amounting to $8.1 Billion.  Dexia's share price reportedly fell 74% in 2008.  

    Dexia SA sold its Bond Insurance business in a private deal with another corporation.  In the November deal, Dexia arranged for a private capital infusion -- after the September bailout -- by which Dexia will receive $361 Million in cash.  Dexia will also obtain a 24.7% share of the buyer, a Bond Insurance Company, Assured Guaranty Ltd.

    The Bond Insurance business sold by Dexia to Assured Guaranty is called Financial Security Assurance, Inc.  Reportedly, Assurance Guaranty purchased all of FSA's "insured portfolio of $425 billion, of which $110 billion was asset-backed securities".  Id.  ("Asset-backed securities is a euphemism.  According to the free online encyclopedia, Wikipedia, Collateralized Debt Obligations are unregulated asset-backed securities:  link here.)

    The private deal does not include a much smaller "$16.5 billion financial products portfolio" held by FSA.  Shenn and Benedetti-Valentini, supra.  This foolish investment portfolio remains with FSA.  Undoubtedly, it is the main reason for the $8.1 Billion bailout by France, Belgium and Luxembourg.   Two of those three nations, France and Belgium, will reportedly guarantee FSA's "assets."  

Please Read The Disclaimer.

 

    

     

Employer-Provided Health Insurance Plans: "One Way, or No Way!"

    Annual deductibles of $1,100 and more for an individual will reportedly be common in the next year.

    That is, if the individual is fortunate to work for an Employer which offers a Health Insurance Plan at all.

    Deductibles on Family Coverage will be even higher.

    Health Insurance Plans with high deductibles were introduced in 2002.  Such Plans have understandably not received good reviews from Employees.  Employees have declined to participate in such Plans where their participation was voluntary.  "But this year, at more than 100 large companies and hundreds of smaller ones, the high-deductible plans are the employer's single take-it-or-leave-it option."  Milt Freudenheim, "Workers See Health Care Menu Shrink" p. B1, col. 1 (New York Times Nat'l Ed., BusinessDay Section, Saturday, November 15, 2008).  See also Lisa Girion, "Deductibles March Higher for Employer-Provided Health Insurance" (Los Angeles Times Online, Thursday, November 20, 2008); Anika Myers Palm, "Employees Dig Deeper in Pockets" p. C1, col. 5 (Orlando Sentinel, "Business & Money" Section, Thursday, November 20, 2008).

Please Read The Disclaimer.

California Fires, Global Financial Failures Not Problems for Property-Casualty.

    California fires have reportedly led to an examination of the ability of Property-Casualty Insurance Companies to pay Claims -- and to be solvent after that.  The answer is that Property and Casualty Insurance Companies are the strongest financial performers in the Insurance Industry today.  See David Pierson, "Insurers Likely to Weather California Firestorm" (Los Angeles Times Online, Tuesday, November 18, 2008).

Please Read The Disclaimer.

Sector Snapshot: Insurance.

    Here it is, our irregularly featured "Sector Snapshot," courtesy as ever of The New York Times.  Go to the "Category" selection box, choose "Financials" and then "Insurace" on this interactive program.  This information was published in the New York Times National Edition on Tuesday, November 18, 2008.

    Note that the Insurance Companies shown to be the best performers in this Snapshot are Property and Casualty Insurance Companies. 

    The worst performers in this Sector Snapshot?  Life Insurance Companies.

Please Read The Disclaimer.

Bond Insurance: States, Cities Sell Bonds ... Still Need Bailouts.

    The finances of States, Counties and Cities appear to be in bad shape.  Things may only be getting worse.  Munis and Insurance or guarantees are not the whole story, not any more, not now.

    As readers of this space know, "munis" is short for "municipal bonds," a broad one-word identification of all kinds of State, County, City and other Local Government-issued Bonds.  Recently, Bond Insurance Companies became unable to sell Bond Insurance.  Unregulated non-Insurance Companies have offered Credit-Default Swaps instead of Insurance as supposed guarantee agreements on the bonds.  Some reports are that munis are not sellling; other reports have it that wealthy investors are buying munis anyway in order to avoid taxes under the incoming Administration.

    Local Governments are facing financial situations that go way beyond munis.  Their problems include paying higher returns on munis in order to entice investors.  However, the fiscal problems of Local Governments reportedly only include munis and are not by any means limited to munis.

    Governors in States including California and  New Yok  are expressing needs for a Federal bailout.  Some of the problems States face at this time Include cuts to higher education.  Courses are being cut, instructors are being released, and tuition is climbing rapidly at a time when people cannot easily afford increased tuition in particular.

    The States are also concerned about their share of Medicaid reimbursements.  More people are rapidly and involuntarily joining the ranks of the unemployed.  They lose access to Employer-provided  Health Insurance Plans.  Medicaid, where available, assumes greater and greater importance as a social safety net. 

    Further, States are searching for ways to fund their Unemployment Insurance Funds.  Reportedly, New York, Michigan, Indiana, Ohio and Souh Carolina have reserves on hand adequate to pay 3 months or less of the average Unemployment Insurance Benefits in their States.  See, .e.g,, Keith B. Richburg and Ashley Surdin, "Facing Shortfalls, States Seek Emergency Aid From Washington" (Washington Post.com, Sunday, November 16, 2008).  See generally Jennifer Steinhauer, "Facing Deficits, States Get Out Sharper Knives/Huge Revenue Decline/Deep Cuts, U.S. Loans, Hiring Freezes, Taxes Are All on Table" p. A1, col. 1 (New York Times Nat'l Ed., Monday, November 17, 2008).

    Philadelphia, Atlanta and Phoenix are Cities that have already applied to the current U.S. Treasury Department to participate in receiving bailout funds.  San Jose, Los Angeles and San Francisco are reportedly readying their own applications for bailout assistance, too.  Reportedly, if the Federal Taxpayer Funds are received by these Cities they will be used for a variety of purposes including construction projects, pension and retirement costs, water-treatment facilities, and transportation projects.  Adam L. Cataldo and William Selway, "U.S. Cities, Reeling From Deficits, Seek Bailout Cash (Update 3)" (Bloomberg.com, Friday, November 14, 2008).  See, e.g., Money & Co. Blog, Los Angeles Times Online, Business Section, "Philly, Atlanta and Phoenix Ask Treasury For $50B For Cities" (Posted Friday, November 14, 2008).

    Please Read The Disclaimer.

"Troubled Assets Insurance" and "Financing Fund": Outline of TARP Insurance.

    In a previous post, it was reported here that the Emergency Economic Stablization Act of 2008 enacts a new Federal Insurance Program.  Here is the Act; the new Federal Insurance is enacted in Section 102.

    The Insurance for TARP is new because TARP is new.  "TARP" is the Federal acronym for Troubled Assets Recovery Program, i.e., the Federal handout, er, bailout for "troubled assets originated or issued prior to March 14, 2008, including mortgage-backed securities."

    In Section 102, Congress required the Treasury Secretary to establish a guarantee program to back TARP.  In basic terms, Premiums are to be set by the Secretary in an amount sufficient to provide necessary reserves.  Premium rates are permitted under the Act to vary "according to the credit risk associated with the particular troubled asset that is being guaranteed,"  but the Secretary is required to "publish the methodology," and the Secretary's methodology "shall ensure" that the necessary Premium is charged. 

    Above all, and over all, Premiums for this new Federal Insurance "shall be set by the Secretary at a level necessary to create reserves sufficient to meet anticipated claims, based on an actuarial analysis, and to ensure that taxpayers are fully protected."

    Time will tell, as they say.

    Many thanks to Ms. Lori A. Montgomery of the Washington Post, a fine reporter who knows more about these subjects than most people will ever learn unless they read her reports, for her assistance in locating these provisions in an Act that runs to 451 pages. 

Please Read The Disclaimer.

Risk Management Lost: Part II.

    This follows a recent previous post about the role of Risk Management in the financial fiasco.  To that previously posted list of ways to have a financial breakdown, including in Insurance, should be added:

       It is not good risk management to silence Risk Managers, even if they appear to be "critics" of a Corporate profit center.

        It is also not good risk management to silence other people whose feedback is essential to the Risk Managers' evaluation of risk, which is one of the things that only Risk Managers do.

See also Gretchen Morgenson, "How the Thundering Herd Faltered and Fell/Merril Lynch Couldn't Escape the Housing Crash" p. 1, col 1 (New York Times Nat'l Ed, SundayBusiness Section, Sunday, November 9, 2008).

Please Read The Disclaimer.

 

 

 

Goldman Markets Munis, Sachs Issues Credit Default Swaps

    Bonds issued by local governments, known as "munis," have rarely if ever defaulted.  They have probably never needed to be backed by Bond Insurance.  As many readers of past posts in this space have read here, Bond Insurance made its appearance in a market that was 'created' for it, a market that never previously existed -- and was never needed.

    With the demise of Bond Insurance Companies, however, suddenly the Bond Insurance market was open for business with no competition.  Goldman Sachs and other issuers of Credit-Default Swaps swiftly made their appearance.  They filled the "void" with Credit-Default Swaps, an unregulated form of Insurance.  The CDS's, as they are known, were sold by issuers like Goldman Sachs for the supposed security of investors buying munis, just as local governments once paid Premiums on Bond Insurance.

    There was a problem in California (and perhaps elsewhere), however.  In California, Goldman Sachs also marketed the State's munis at the same time that it was hawking its own Credit-Default Swaps to back those munis on the ground that California might default on the munis.  (Ironically, California has reportedly NEVER defaulted.)

    This has struck some as a possible conflict of interest, although apparently the current Securities and Exchange Commission apparently has decreed that it is not a conflict of interest for one division of a large business entity to market munis, while a different division of the same entity disparages them in order to market its Credit-Default Swaps guaranteeing the face amount of the munis should they default.  See Sharona Coutts, Marc Lifsher and Michael A. Hiltzik, "Goldman Sachs Urged Bets Against California Bonds it Helped Sell" (Los Angeles Times Online, Tuesday, November 11, 2008).  It appears from the linked article that Goldman Sachs has discontinued the practice.  See id.

    "Indeed, what some traders found perplexing about the push for a market in municipal credit default swaps was that muni defaults almost never happen."  Id.

Please Read The Disclaimer.

    

    

Municipal Bonds: What Insurance?

    Although the absence of availability of Bond Insurance is not mentioned in the linked blog, its absence is starkly illuminated by this report about the woes faced by Munis issuers who until recently could not find many takers:  Money & Co., "'Barack Attack':  Muni Bond Demand Rises On Tax-Hike Fears" (Los Angeles Times Online, Business Section, posted Friday, November 7, 2008).

    The linked report posts information that some wealthy investors are buying munis because they are afraid that the President-Elect will seek to increase the tax rates on some wealthy people, as he promised to do during the recent presidential campaign.  Id.

    The implications of this event, if accurate, would be enormous.  Local government entities have rarely if ever defaulted on the bonds they issue, called "munis".  That fact is clear from several previous posts in this space.

    As previous posts here also make clear, there are as a result hardly ever any Claims upon Bond Insurance Policies.  The Bond Insurance Companies marketed their Bond Insurance Policies on the strength of their own high Credit Ratings.  Their high Credit Ratings motivated investors to invest in munis protected by Bond Insurance Policies issued by Bond Insurance Companies with high Credit Ratings. High Credit Ratings of Bond Insurance Companies were the equivalent of stock in a store:  The Companies "sold" their high Credit Ratings to local governments issuing bonds, who paid Premium money to the Bond Insurance Companies in order to sell munis to investors.

    Rather than being content with collecting and investing Premium money with great success, and never paying Claims, instead Bond Insurance Companies lost their high Credit Ratings (abruptly, too) after the bottom dropped out of the market for credit derivatives.  The same Bond Insurance Companies which once sold high Credit Ratings to local governments issuing munis, suddenly no longer have high Credit Ratings to sell.

    Investors have reportedly resumed investng in munis even without the guarantee of Bond Insurance.  Instead of a guaranteed return on a protected investment, these investors are afraid of paying higher taxes so they are investing in what were the safest investments of their kind all along:  Munis, regardless of Bond Insurance or not.

Please Read The Disclaimer.

AIG "a systemically important company" -- New Deal for an Old Company.

    Untested claims are apparently the reason for the current Treasury Department, extending more Federal Taxpayer Funds in a better deal for the reclamation of AIG.  No, not "claims" on Insurance Policies.  Claims that AIG cannot raise private capital without a supposed "fire sale."

    Newspaper reports today lead with the language that the previous bailout deal with AIG "was putting too much strain on the company."  Andrew Ross Sorkin and Mary Williams Walsh, "U.S. Provides More Aid to Big Insurer" (New York Times Online, Monday, November 10, 2008).  To like effect describing this as a "strain" on the company, is this report by Carol D. Leonnig, "AIG Close to Getting New, Larger Bailout" (Washington Post.com, Monday, Novermber 10, 2008), reposted as "Government to Grant AIG New, Larger Bailout".  The bailout, otherwise known as the Emergency Economic Stabilization Act of 2008, was never intended to protect AIG from "strain".  The infusion of capital by using Federal Taxpayer Funds was always intended, instead, to protect the national economy from chaos.  There is a difference.

    The new deal negotiated by AIG with the current regime "would help the company".  Andrew Ross Sorkin and Mary Williams Walsh, supra.  But that is not the point.  Not at all.  Will the deal now help the national economy and the Federal Taxpayer, even at the expense of an individual Company, or will it instead help the Company at the expense of the Federal Taxpayer?

    In basic terms, there are currently two (2) ways to raise capital.  One is by using Federal Taxpayer Funds through the current federal government regime, and the other is by raising private capital.  Either way, the purpose is to generate a so-called infusion of capital.   What AIG reportedly tried to do was to raise private capital to finance guarantees it made of toxic Collateralized Debt Obligations or "CDOs".  AIG's CDO guarantees generated calls for collateral.  This means that AIG had to raise cash to pay those calls based on obligations assumed by one among many AIG member companies.  AIG reportedly tried to raise private capital -- cash -- by selling off certain successful Insurance Companies that were not apparently tied to the toxic CDO obligations of AIG. 

    If successful in making those sales, AIG would raise the cash by raising private capital, of course, but AIG would no longer own the successful Insurance Companies that AIG was selling to others.  Many of AIG's member Insurance Companies were and are still very successful.  For a list of AIG Member Companies, go to www.aig.com.  (How hard AIG tried to raise private capital is subject to question by many questioners.)  Essentially, AIG gave up.  AIG and certain shareholders of AIG's deflated stock termed the effort "a fire sale."  See Andrew Ross Sorkin and Mary Williams Walsh, supra; Carol D. Leonnig, supra.

    In the restructured deal with AIG, it is reported on Monday, November 10, 2008 that Federal Taxpayers will spend $30 Billion while AIG offers $5 Billion -- or less than 15% of the total -- to buy up the CDOs.  The purchase price of the CDOs reportedly will be set at 50 cents on the dollar.  The combined $35 Billion will be used to purchase $70 Billion of the Collateralized Debt Obligations foolishly guaranteed by a member company of AIG (a member company which, to say again, is not one of its successful Insurance Companies).  AIG reportedly will incorporate "a new entity" which will hold these previous liabilities, which accountants will remove from AIG's own balance sheet.  See Andrew Ross Sorkkin and Mary Williams Walsh, supra.  Under this new deal, AIG will keep its successful Insurance Companies and not sell them off to gain private capital.

    Federal Taxpayer Funds will not stop there, apparently.  Under the new AIG deal with the current Treasury Department, an additional $22.5 Billion in Federal Taxpayer Funds will be given to AIG for the purpose of also purchasing other financial products that AIG foolishly guaranteed, namely, "residential mortgage-backed securities".  AIG will be asked to contribute $1 Billion or 4.3% of the total in that regard.  See Andrew Ross Sorkin and Mary Williams Walsh, supra.  Once again, accountants will remove losses from AIG's bottom line because again, a new corporation or corporations will purchase and hold these previous liabilities, too.  Also, as with CDO purchases under this new deal negotiated by AIG, AIG will keep its successful Insurance Companies and not sell them off to gain private capital.

    The changes in AIG's new deal are enormous.  In short, the changes negotiated by AIG change the whole intent of the appropriation of Federal Taxpayer Funds.  Rather than using Federal Taxpayer Funds in an emergency to shore up the national economy in a crisis, the current Treasury Department is agreeing in this deal to use Federal Taxpayer Funds to protect AIG in its emergency right now, with any benefits to the national economy to come much later, if at all.  This is not a good change for the Federal Taxpayer.  It is not capitalism.  And it is not wise policy for the use of Federal Taxes.

Please Read The Disclaimer. 

Risk Management Run Aground.

    Risk Management seems to have been run into the ground.  Recent months have brought many examples of Insurance failures. They have been part of the overall financial fiasco across the world, to be sure.  But they are real and they are failures.  They are failures that lower the value of many Insurance Companies whose operations have been extended far beyond Insurance Coverage for quantifiable risks.

    Five ways to a breakdown in financial risk management are reportedly analyzed by Rene Stulz in an article to be published in a future Harvard Business Review article.  At this time, they are summarized in a post by David Champion on HBR Editors' Blog, "Lesson From the Crisis:  Risk Management Has Limits" (October 28, 2008):

        1.  "Mismeasuring known risks."

        2.  "Ignoring knowable risks."

        3.  "Failing to communicate risks."

        4.  "Failing to capture changes in risk."

        5.  "Concealing risks."

    Each of these five ways to a breakdown in risk management has led to breakdowns in Insurance Risk Management.  Can Insurance Risk Management find the way back, or perhaps, find the way to the future?  More broadly, can financial risk management in general find the way?

    They have to.  Failure is not an option, not any more.

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Man Bites Dog ... Berkshire Hathaway Loses Money!

Insurance Losses and Investment Losses on Derivatives Drop Value in 3Q 2008 Reported Results.

    Berkshire Hathaway reports that its 3Q profit declined 77%.  It was the fourth straight Quarterly drop for Berkshire Hathaway.  Reportedly, that has not happened since at least 1995.

    Berkshire Hathaway's 3Q report includes a drop in "operating profit" in its Insurance subsidiaries, although they are still in the black, turning a profit still.  Berkshire Hathaway's Insurance subsidiaries include GEICO and General Re.  Their income in 3Q 2008 was reportedly $81 Million, down from $486 Million.  3Q 2008 Hurricane losses of $1.05 Billion were reported.

    However, in addition Berkshire Hathaway reported also on certain losses with which it began 2008, which tanked even further in 3Q 2008:  Derivative Contracts.    E.g., "Berkshire Hathaway Profit Tumbles 77%" (Associated Press Copyrighted Report published in New York Times Nat'l Ed., p. B8, col. 4 Business Day Section, Saturday, November 8, 2008); Earnings Roundup, "Berkshire Hathaway Profit Falls 77%/Lower Insurance Returns Send Profit Down 77%" (Los Angeles Times Online, Saturday, November 8, 2008).  Those are the "weapons of financial destruction," to quote Mr. Warren Buffett the prime mover behind Berkshire Hathaway, that are responsible for the world's credit chaos at this time.

    Reportedly, Berkshire Hathaway began 2008 with "an unrealized $1.67 billion loss" on its derivative contracts and, in 3Q 2008, they lost value in the reported amount of $1.05 Billion, the identical, exact amount reported by Berkshire Hathaway as the total of its 3Q losses on Insurance Claims from Hurricane damage.

    It is fair to say, based on these results, that the damage caused by Derivative Contracts is equivalent to the insured damage caused by a Hurricane.

Postscript of Monday Evening, November 10, 2008:

And see this Blog Post by Julie Patel on "House Keys" Blog, "Even Warren Buffett Takes a Hit as Insurance Industry Sees More Trouble", November 10, 2008.

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Insurance for Defaulting Defense Coverage?

     The financial woes of AIG and of Hartford Financial Services have been widely reported.  AIG has been taken over by the Federal Government and Hartford Financial has experienced a drop in share price of 88% in 2008.

    Aon Corporation, however, reportedly maintains that both carriers are able to back up their Insurance Coverages.  Just in case, Aon is apparentlly arranging for some form of contingent Liability Insurance Coverage.

    It is unclear, at least to this writer, how this Coverage would work.  A search on the Aon web site on Sunday morning, November 2, 2008 was of little help in understanding it.  Coverage would reportedly be available "in instances where a group of insurers share a risk of paying for a client to defend against lawsuits, [and] Aon will arrange for an additional company to backstop the coverage should one of the primary carriers fail."  Andrew Frye, "Aon Creates Insurer-Default Product, Backs Hartford (Update 1)" (Bloomberg.com, Friday, October 31, 2008).

    The same reporter authored a story that was published on the same day at Bloomberg.com reporting that Aon's own profit is also down substantially in 3Q 2008.  Andrew Frye, "Aon Profit Slips 43% as Economy Slows, Rates Decline (Update 1)" (Bloomberg.com, Friday, October 31, 2008).

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Health Insurers, Social Security ... And Sweet Smells Success?

    A previous post in this space addressed reports that some Health Insurance Companies were steering their policyholders into applying for Social Security Benefits before the Companies would allegedly process the claims for Health Insurance Benefits.

    Six claims were reportedly singled out as a representative sample of this alleged practice.  Evidence about the 6 claims was submitted to a Jury in a Federal lawsuit against Unum, reportedly "the nation's largest disability insurer".

    In 2 of the cases, the Jury reportedly found that Unum "had committed fraud ... by requiring customers to apply for Social Security benefits even though it knew they were not eligible."

    In 2 other cases, the same Jury reportedly found "no evidence of fraud."

    In the remaining 2 cases in this selected sample, the same Jury was reportedly unable to reach a verdict.

    A spokesperson for Unum reportedly claimed that this was a victory, as it reputedly showed that Unum did not consistently commit fraud by referring policyholders with Health Insurance Claims to the Social Security Admiinistration.  Mary Williams Walsh, "Disability Insurer Found Guilty of Social Security Fraud" p. B2, col. 1 (New York Times Nat'l Ed., Business Day Section, Friday, October 24, 2008).

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Bonds, Bond Insurance, Bailouts and Bull Dinky.

    Bonds are at the heart of the credit chaos gripping the world right now.  Bonds are a major source of grief to cities and school districts which suddenly find themselves on the hook for guarantees they never fully realized they made, for example.  Chares Duhigg and Carter Dougherty, "From Midwest to M.T.A., Pain From Global Gamble" p. 1, col. 1 (New York Times Nat'l Ed., Sunday, November 2, 2008).

    Bond Insurance Companies were on solid footing financially when they stuck to insuring bonds.  Once they left their only known area of expertise and ventured for example into the land of subprime mortgage securitization, they began losing their Credit Ratings.  Without their Credit Ratings, they lost the ability to insure bonds.  Without their ability to insure bonds, they are apparently headed for bankruptcy -- except that some Bond Insurance Companies are lining up for a Federal handout, if they can get it.  Peter Whoriskey, David Cho and Zachary A. Goldfarb, "Treasury, FDIC Near Deal on Mortgage Aid" (Washington Post.com, Thursday, October 30, 2008).

   Finally, the current Chair of the Federal Reserve has recently told people attendng a symposium at U. Cal.-Berkeley on mortgages and the economy, that it may be worth the while of the Federal Government to consider making a new Federal agency, one to issue Bond Insurance in connection with mortgage financing.  David Stout, "Bernanke Sees Role For U.S. in Homes" p. B3, col. 6 (New York Times Nat'l Ed., Business Day Section, Saturday, November 1, 2008), published online with the headline, "Bernanke Says Mortgage System Needs Safeguards"..

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Credit-Default Swaps Values Provided Online ... Value Provided TBD.

    The Depositary Trust and Clearing Corporation ("DTCC"), an industry-owned and -operated creature, is scheduled to publish weekly values for Credit-Default Swaps.  The DTCC will publish "on its website www.dtcc.com/derivserv the outstanding gross and net notional values ('stock values') of credit default swap (CDS) contracts registered in [its Trade Information] Warehouse for the top 1,000 ... entities and all indices, as well as certain aggregates of this data," according to this October 31, 2008 DTCC Press Release, "DTCC to Provide CDS Data From Trade Information Warehouse".

    The first values were published by DTCC on Election Day, 2008:  At that time, the DTCC reported a total value in Credit-Default Swaps of $33.6 Trillion or $33,600,000,000.00 "on corporate, government and asset-backed securities.  That is less than some earlier estimates of $50 trillion or more."  Deal Book, "D.T.C.C. Puts Market for Credit Swaps at $33.6 Trillion" Andrew Ross Sorkin, Ed., New York Times Business Section Online, Tuesday, November 4, 2008.

    DTCC's controlling board includes JP Morgan Chase, and Goldman Sachs, which for more than three decades was the source of Millions of Dollars paid to the current Secretary of the Treasury.  The Treasury Department is caught up in currrent efforts to put values on Credit-Default Swaps.  Treasury will undoubtedly turn to DTCC for information concerning those values, if any.

    Credit-Default Swaps are an unregulated form of Credit Insurance, as has been posted many times in this space.

    It remains to be seen whether the information forthcoming from the Depositary Trust and Clearing Corporation will be informative to those who do not already understand Credt-Default Swaps (if in fact anyone besides their makers actually understands how they work, you should pardon the expression).

Postscript on the Evening of Thursday, November 6, 2008:

"TBD" may have been determined today.  It is reported that the DTCC data simply do not include information on the "privately negotiated credit-default swaps that insurers such as AIG, MBIA Inc. and Ambac Financial Group Inc. sold to guarantee securities known as collateralized debt obligations."  Shannon D. Harrington and Abigail Moses, "Credit Swap Dsclosure Obscures True Financial Risk (Update 3)" (Bloomberg.com, Thursday, November 6, 2008).

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Vigilance Required By Citizens, For Citizens.

CITIZENS PROPERTY INSURANCE CORPORATION:  THE REASON IT EXISTS IN FLORIDA.

Citizens Property Insurance Corporation was made by the Legislature of Florida in response to a lack of available Property Insurance.  After the 2004 Hurricanes swept the State, many Floridians simply could not buy Homeowner's and other Property Insurance at any price.

    At that time, and since, Homeowner's and other kinds of Property Insurance with private Insurers has largely been unavailable, for example,  to people located on the coasts of the Florida peninsula.  Even inland areas are affected.  Thus, the Florida Legislature made Citizens Property Insurance a so-called "insurer of last resort" for Policyholders to be able to obtain some form of Property Insurance Coverage.  However, the Coverage offered by Citizens was never intended to compete with the State Farms or Allstates of the insurance world.

THE SHIFT FROM CITIZENS POLICIES TO PRIVATE INSURANCE POLICIES.

    Reportedly many Homeowner's Insurance Policies are being shifted from Citizens to the private sector.  This is not surprising.  That is what the law making Citizens has provided from the beginning.  Many of the private Insurance Companies are new and untested, and they reportedly "are not the State Farms or Allstates of the insurance world."  Ivan Penn, "Citizens Policies Quietly Shift to Low-Rated Firms" (St. Petersburg Times Online, Friday, October 31, 2008).   This is not a surprise, either.  Certainly not to Citizens Policyholders.  Citizens was made in the first place to provide an opportunity for Policyholders to get Insurance; that Insurance was never intended to compete with Insurance Companies who did not offer that Insurance at all.

   The linked newspaper report provides a public service, however, to Policyholders whose Property Insurance Policies would be renewed by unfamiliar Insurance Companies.  To provide at least some of the available ratings of those companies is to provide a valuable piece of information to any consumer in that position.

NOT ALL CREDIT RATING COMPANIES ARE THE SAME.

    The report linked above is of potenially even greater value in providing information not generally known inside or outside of what the reporter calls "the insurance world."  Apparently, not all Insurance Ratings Services are the same.

    For example, reportedly a Ratings Service cited extensively in the report called "TheStreet.com," is "independent and generates revenue from its publishing arm and through advertising sales".   Id.  The reporter contrasts that Rating Service, for example, with one cited by one of the new and unfamiliar Insurance Companies, which is a Rating Service called "Demotech".  According to the report, "insurers pay Demotech an average of $6,000 a year to be rated; two-thirds of them receive an A."

    Florida Policyholders, including those holding Policies of Insurance issued by Citizens, check out these cites and the linked newspaper report for yourselves.  Mull over the information that you will find there.  Policyholders and for that matter all persons in and beyond Florida, feel free to do the same.  You will not lose by learning.  You may instead be better off, and the choice is yours.

SMALL-BUSINESS INSURANCE COVERAGES, COMMERCIAL COVERAGES, AND CITIZENS.

    Commercial Insurance is a problem in Florida.  Many business people have urged private Insurance Companies and also Citizens Property Insurance Corporation to offer Wind Coverage and Theft, Fire and similar Coverages in the same Insurance Policy.  Many people seeking Insurance in Florida are also reportedly seeking some parity in the markets for so-called "residential homeowners" Coverage, "commercial-residential coverage (condos, apartment buildings and common areas)" and "the commercial-commercial coverage for business buildings and strip malls, which are still covered solely in Florida by Citizens."  Terry O'Connor, "Commercial Executives Encourage Private Insurers to Provide More" (Tampa Bay Business Journal, Friday, July 11, 2008).

    Some relief may be on the way.  The Florida Legislature in 2008 authorized Citizens to offer various Coverages to small businesses which could not otherwise find affordable Commercial Coverage.  Citizens is accordingly set to offer "commercial nonresidential policies effective Nov. 17."  However, a spokesperson for Citizens says that Citizens does not expect much to come from that line of new business because the "'private market'" will likely be offering the needed Coverages.  "Citizens Finally Ready to Offer Small-Business Policies" (St. Petersburg Times Online, Monday, November 3, 2008).

Postscript on Sunday Morning, November 9, 2008:

Other changes that are said to take effect soon include Citizens Property dropping Windstorm Coverage for Inland Businesses in Florida in Policies that provide "only" Coverage for Wind Damage.  This particular change is reported to take effect on November 14, 2008.  Blog Post by Julie Patel, "House Keys/No More Wind-Only Coverage From Citizens For Inland Businesses" (Sun Sentinel.com, Posted November 4, 2008).

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Fiduciary Duties to Shareholders by Banks?

    Duties owed to Shareholders of Banks that allegedly are run by Officers or Directors who make loans they should not make, are currently under examination in many news reports, Court cases, and other places.   Shareholders are suing the executives who allegedly put such  systems in place which overrode shareholders' interests -- and which predictably resulted in failure of the lender that the shareholders held shares in.  Some of the allegations and testimony in one of many pending lawsuits is examined by Gretchen Morgenson, "Fair Game/Was There a Loan It Didn't Like?" p. 1, col. 1 (New York Times Nat'l Ed., SundayBusiness Section, November 2, 2008).

    Research on Sunday, November 2, 2008 on Pacer, the Federal Courts Electronic Court File, reveals that there are many such cases and it is unclear which of these is the one addressed in the linked newspaper report.

    A post addressing this issue can also be found on www.insuranceclaimsbadfaith.typepad.com.

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Health Insurance Gurus Predict Higher 2009 Deductibles, Premiums, Less Coverage.

    The general ideas that Health Insurance Coverage Deductibles and Premiums are likely to continue to climb in 2009, while Health Insurance Coverage offerings are likely to shrink, are certainly accepted by most people.  The Kaiser Family Foundation puts some figures in those equations in its 2008 Survey of Employer Health Benefits.

    Among the numbers reported by the Kaiser Foundation:

• 63% of Employers offered Health Insurance in 2008, about the same number (60%) that offered it in 2007.
• The larger the Employer in terms of the number of Employees, the more likely it is that an Employer will offer Health Insurance Benefits:  49% of Employers with 3 to 9 Employees; 78% with 10 to 24 Employees, 90% with 25 to 49, and more than 95% of Employers employing 50 or more people.

    The numbers in this survey reflect that Employers will continue to offer Health Insurance Benefits in the year to come, but at the cost of larger Premiums borne by the worker:

• Respondents in the Kaiser survey of Employers supplied numbers that show a continuing increase in Health Insurance Premiums of 119% for "family coverage" since 1999.  Overall, the actual Premiums charged to Employers for "family coverage" are generally smaller for "small" Employers than for "large" ones.  However, on average, Employees working at "smalll" Employers (3-199 Employees)  also contribute much more money toward Premiums for "family coverage" but contribute lower Premiums for "single coverage"  than do workers for "large" Employers.
• "Cost sharing" is in the midst of a continuing steady increase.  These are costs paid by Employees in addition to Premiums when they actually use the offered Health Insurance.
• Some 80% of "single coverage" participating Employees contribute to the Employer's Health Insurance Premium, while 90% of family coverage participants so contribute.

     Finally, Employee contributions are expected to increase substantially in 2009.  The largest numbers of Employers answering the Kaiser Family Foundation Survey reported that they are "very or somewhat likely" to raise the contribution amount, to increase deductibles, to raise the amount of cost sharing, and to raise the amount that participating Employees pay for prescription drugs.  Very few Employers report, however, that they are "very likely or somewhat likely" to drop Health Insurance Benefits entirely.

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