EU in Wonderland

"The bailout package for eurozone governments facing debt troubles has created another urgent challenge for European policy makers: how to keep free spending governments in line. ... Because there was no currency risk, banks, insurance companies and pension funds in every euro-zone economy became the biggest investors in the bonds issued by governments of other countries using the euro. .... Although the budget policies of euro-zone members were tied together in this way, without people really noticing, there were no mechanisms to prevent governments from overspending. ... But, in practice, the pact had no bite. ... These packages circumvented rules that many had assumed prohibited bailouts within the euro zone. They also weakened market incentives for governments to get their houses in order. ... 'Profligate countries now can count on the ECB to alleviate market pressure that could provide the only disciplining device before a crisis situation is reached,' Mr. [Marco] Annuziata says. ... As a step toward improving it, Olli Rehn, the EU economic commissioner, is set Wednesday to propose rules, with clear enforcement mechanisms, both to prevent excessive government debts and deficits, and to act more decisively in a debt crisis", my emphasis, Stephen Fidler at the WSJ, 11 May 2010, link: http://online.wsj.com/article/SB10001424052748704879704575236572824559304.html.

This is laughable. There no "rules" for governments, unless you have your own army to enforce them. Unless the EU has its own army and will use it to "enslave" millions of Greeks, Greece's debt will be repudiated. One way or another. What part of this don't you understand? Sovereign debts are usually repudiated. Openly. Or by inflation. Government bonds are a sell. Treasuries, Bunds, Gilts, etc. They all stink. You want to restrain government spending? Have your government go back to the gold standard. "[T]here were no mechanisms to prevent governments from overspending". Of course. As Yves Smith asks, "feature or bug"? What "circumvented rules"? What "clear enforcement mechanisms" short of an army? Will the EU hire the Crips or Bloods to collect from Greece? For a small "emolument", they could likely be enticed into collecting. How small? Say 10% of whatever they collect. Hell, for 10% of say $150 billion, you might be able to get the Zetas to collect for you.

Another Impossible Product

"Some big changes are happening in funds favored by safety-seeking retirement savers. ... 'What the credit crisis exposed is that these vehicles are much more complex than people assumed,' says Steve Deutsch, who tracks the funds at investment-research firm Morningstar Inc. ... This added protection allows investors to trade in and out at a relatively stable value rather than at the underlying portfolio's actual market value, which can bounce around. ... Some funds' market value dropped sharply, making them more reliant on their wrap contracts to deliver book value to investors. That, combined with general bond-market upheaval, made issuers more reluctant to offer the protection. Though the market has stabilized, there is still a significant shortage of wrap contracts, causing higher fees and other headaches for stable-value funds [SVFs] and their investors. ... The Employees Retirement System of Texas, which administers 401(k) and 457 plans for state employees, late last year decided not to renew its contract with its stable-value provider. Its fund's market value early last year dropped to just 89% of book value--helping to push the 'crediting rate,' essentially the yield investors receive, to 3% currently, down from 4% at the start of 2009. ... The shortage of wrap contracts is causing come managers to hold bigger cash stakes, a drag on performance. ... Given the great demand and limited supply of wrap contracts, the issuers of these contracts have plenty of power to dictate their own terms, which aren't always favorable to investors. One outcome: higher fees. ... The wrap provides 'can be as strict as their want to be on terms,' says Chris Tobe, a senior consultant at Bridenbach Capital Consulting who helps employers review [SVFs]. ... All this adds up to lower returns for investors. The average [SVF] delivered 3.1% last year, down from 4.6% in 2008, according to Hueler Cos., which tracks the stable-value industry. ... Investors may also find tighter restrictions on their ability to move from the funds to other investments. Many [SVFs] have long considered certain other investment options, such as money-market funds 'competing funds.' ... Stable-value investors also are vulnerable to rising interest rates. When rates start to rise, yields of money-market mutual funds will likely tick up faster than those on [SVFs]. ... Many newer stable-value products have a number of different wrap-contact issuers, ensuring that investors can trade in and out at book value. Amid the shortage of wrap insurance, though, some firms are seizing the opportunity to reintroduce older types of stable-value products that are backed by a single insurer and carry considerable risks", my emphasis, Eleanor Laise at the WSJ, 1 May 2010, link:

http://online.wsj.com/article/SB10001424052748703572504575214723494032604.html.

SVFs always struck me as a scam. They are sold as if they are bank deposits. If you want to be able to redeem your "investment" at par, you should hold bank deposits. But they pay lower interest rates than other "investments". Precisely. The limit to how "strict" the wrap providers can be is the bank interest rate. The existence of SVFs is another result of Zimbabwe Ben's zero interest rate policy. Of course SVF interest rates change slower than money-market funds. SVFs have longer maturities than money-market funds. Mencius Moldbug has done some fine work describing maturity transformation, which is what SVFs try to sell.

Death Bonds-2

"In a little-known practice, investors can recruit a terminally ill person and together they can scoop up these bonds on the open market for a discount. when the ailing bondholder dies, the surviving co-owner can then redeem them at face value and potentially turn a quick profit. ... But the market's turmoil has made this arrangement more attractive for professional investors, since some bonds are traded at a steep discount. Legal and financial experts say there is nothing to prevent investors from buying the bonds with a dying relative or even a stranger who is terminally ill. ... One investor who scored big on the money-back guarantee is Joseph A. Caramadre, an estate-planning lawyer in Cranston, RI. From 2006 to 2009, Mr. Caramadre recruited several dozen terminally ill people to serve as joint brokerage-account holders. He then brouight survivor's-option bonds trading below face value for each account, according to Mr. Caramadre's lawyer and federal court records filed in Providence, RI, over how to pay out proceeds from the investments. ... While issuers didn't intend for them to be used to make a quick buck, [Edward Best] said, 'there are people out there who will figure out how to game almost anything in the world'," Mark Maremont and Aparajita Saha-Bubna at the WSJ, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704784904575112081251438468.html.

What's the problem here? Should only banksters be permitted to game the system? There would be no problem if the Vampire Squid were syndicating these bonds and reaping a nice fee for doing so.

The Next Pension Disaster

"BMW AG's deal to unload E3 billion ($4.65 billion) of UK pension risk to Deutsche Bank Ag's Abbey Life unit is likely to be followed by similar deals as companies seek affordable solutions to mitigate their pension problems, a cash cow for banks and insurers. ... Pensions consultant and actuaries group Hymans Robertson [HR] said it expects more companies to agree to large longevity hedging deals this year. 'we think the longevity swaps market will cover more than Pound 10 billion of liabilities this year,' up from Pound 4.1 billion in 2009, said James Mullins, a longevity swap expert at [HR]. ... Abbey Life, in partnership with specialist pension insurance company Paternoster, are insuring the plan against the risk that around 60,000 retirees live longer than expected. BMW will pay a premium for the insurance, while Deutsche Bank will spread the risk among a consortorium of reinsurers, including Hannover Re AG, Pacific Life Re and Partner Re. ... One appeal of longevity hedging is that it doesn't require a major upfront cost. Paternoster business development executive Myles Pink said. Instead the company pays a monthly premium for the insurance. ... Hedging part of a pension plan's risk reduces the costs compared with selling the entire plan to an insurer", my emphasis, Kathy Gordon at the WSJ, 23 February 2010, link:

http://online.wsj.com/article/SB10001424052748704454304575080983997544158.html.

More terrible WSJ reporting. Spread the risk? Haven't we heard this song before? This is more derivative nonsense, another accounting scam. How can the insurers charge BWM less than the present discounted value of the "risk transferred"? How can BWM gain from this zero-sum game? Seek affordable solutions? Longevity swap expert? Hahahahaha! No upfront cost? What is the monthly payments' present value? This is absurd. BMW should fire Frederick Eichener, its CFO immediately! Does KPMG, BMW's CPAs, have anyone who understands what's going on here?

Another SEC Nothingburger-2

"A reinsurance firm owned by Warren Buffet's Berkshire Hathaway Inc. reached a $92 million settlement with the federal government that will allow the firm to avoid prosecution for its role in a fraud scheme involving [AIG]. As part of the deal, Berkshire agreed to several coporate-governance concessions. ... It will also pay $12.2 million to settle charges by the [SEC] in connection with the fraud and for helping another company falsify its reported financial reults. ... Several former GenRe executives, including Ronald Ferguson, the former chief executive, and Elizabeth Monrad, the former chief financial officer, were convicted in 2008 on charges that in 2000 and 2001 they helped AIG--which was then a client--improperly inflate its loss reserves, a key indicator of financial health, by $500 million", Amir Efrati at the WSJ, 21 January 2010:

http://online.wsj.com/article/SB10001424052748704320104575015131135869288.html.

Corporate governance is a scam. This is another joint SEC-DOJ failure to enforce the law.

Pimco, the New Vampire Squid

"A switch in how state regulators size up insurers' risks will save the industry more than $5 billion in capital requirements, New York officials said Monday. ... In ditching the ratings firms, the regulators said they had lost faith in the ratings firms' ability to size up risk in insurers' big holdings of residential-mortgage bonds. In choosing Pimco for the high-profile assignment, they cited the rating firms' widely publicized shortcomings in initially rating many of the bonds as triple-A, the highest rating, then last year downgrading waves of the bonds to 'junk' status. ... Some have critcized the regulators for changing their methodology in a way that could lead to a more-lenient outcome for the insurance companies, saying the move could weaken protection for policy holders", Leslie Scism at the WSJ, 5 January 2010, link:

http://online.wsj.com/article/SB10001424052748704350304574638823927363010.html.

Apparently Pimco is our new Vampire Squid (VS) as old VS developed a foul odor since it claimed to do "God's work". Neal Kasksahri formerly of VS and Treasury recently went to work for Pimco. When will Hank Paulson and Robert Steel decamp to Pimco? Will this regulatory change do anything for insurance company policyholders? Why ask?

UK and Glass-Steagall

"Bank of England governor Mervyn King, saying new regulations won't prevent failures of big banks, made a strong call for breaking up some of the world's biggest financial firms, a view that takes on increasing significance because he is likely to gain new regulatory powers in the next year. ... Finance ministers across Europe share Mr. King's worries about systemic risk and on Tuesday signed off on an agreement in principle to establish a financial watchdog covering the 27-nation bloc. But the UK held up formal approval because of concerns that three banking subsidiary supervisors covering banking, financial markets and insurance could impose decisions on national governments with fiscal consequences.'The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believes, force us to confront the "too important to fail" question,' Mr. King said in a speech to Scottish businesssmen Tuesday. 'The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.' ... Mr. King appeared to take a swipe at recent banking overhauls put in place by the FSA, the Labour Party and banks themselves, saying that there had been 'little real reform.' Mr. King's views will get a hearing from the opposition Conservative Party, whose finance spokesman said that these 'is a case for separating banking from riskier activities,' though he belives that needs to be done on an internantional scale", Natasha Brereton and Stephen Fidler at the WSJ, 21 October 2009, link: http://online.wsj.com/article/SB125607015746097133.html.

"'Why,' Mr. King asked, 'were banks willing to take risks that proved so damaging both to themselves and the rest of the economy?' His answer: 'One of the key reasons ... is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as "too important to fail"'. Politicians--and the US [Fed] Chairman--hate hearing that it was their subsidies for credit and for the biggest banks that contributed to the problem", WSJ Editorial, 23 October 2009, link: http://online.wsj.com/article/SB10001424052748704224004574489254094714512.html.

Corporate limited liability is the problem. Answer: ban corporations from holding federally insured deposits. Henceforth only unlimited liability general partnerships may hold them. If vampire squid wants to gamble with its money, fine, not with public funds.

I don't care what Zimbabwe Ben thinks. Low interest rates were largely responsible for our current crisis.

MSM Shill for Obamacare

"On the surface, there was nothing unusual about the Oct. 6 telephone call between White House health-care boss Nancy-Ann DeParle and Karen Ignagni, the leading medical-insurance lobbyist in Washington. ... Five days later, Ignagni released an analysis by PricewaterhouseCoopers [PWC] that claimed, on the basis of a misleading reading of the bill, that reform could lead to a painful spike in insurance premiums for ordinary Americans. ... The [America's Health Insurance Plans] AHP report was the kind of one-sided study that lobbyists sometimes commission to create scary sound bites. ... The report analyzed the impact of four narrow features of the Senate Finance bill using a worst-case-scenario model; it concluded, as Ignagni says, that 'health care costs [would] increase far faster and higher than they would under the current system. A fairer reading of the bill, which cleared the Finance Committee on Oct. 13 with a 14-9 vote, with one Republican supporter, suggests these projected costs are wildly exaggerated", my emphasis, Michael Scherer and Jay Newton-Small (S&S) at Time, 26 October 2009, link: http://www.time.com/time/magazine/article/0,9171,1930527,00.html.

S&S, shut up. Stop editorializing in a "news" article. Stop shilling for Obamacare. I agree with Big 87654 firm, PWC here. My "back of the envelope" calculations are in PWC's ballpark. Why care if "congressional bean counters" look at this? Will any "cost" calculations over the next ten years be within 50% of being correct anyway? "Misleading" by whose standards? Will any Obamacare supporters' study be "objective"? Who are you kidding? Reality is: you guys want Obamacare to pass. End of story.

Not Again

"A new wave of financial alchemy is emerging on Wall Street as banks and insurers seek to make soured securities look better. Regulators are pushing back, saying the transactions don't have enough substance and stand to benefit bankers and ratings firms. ... The popular deals are known as 're-remic,' which stands for resecuritization of real-estate mortgage investment conduits. The way it works is that insurers and banks that hold battered securities on their books have Wall Strete firms separate the good from the bad. The good mortgages and bundled together and create a security designed to get a higher rating. The weaker securities get low ratings. ... Some state insurance regulators worry that current ratings are flawed--perhaps even too harsh--for determining the capital that should back up residential-mortgage securities. But they are chafing at the re-remic strategy. That's partly because of the fees and partyluy because re-remics rely on ratings firms--faulted for failing early on to identify problems with mortgage-backed bonds--to rate the new securities", Leslie Scism and Randall Smith at the WSJ, 1 October 2009, link: http://online.wsj.com/article/SB125434502953253695.html.

They're kidding. That any regulator would let one dollar of re-remics be peddled under current circumstances shows how complete regulatory capture is.

Rating Agency Snake Oil

"Regulators of some of the biggest bond buyers in the world are considering cutting credit-ratings firms' role in the market in response to botched ratings of complicated mortgage securities. Ratings firms including Standard & Poor's and Moody's Investors Service [MIS] are facing fresh dissent from state insurance regulators, who are cosidering moving away friom the firms ratings' are a way of measuring the health of insurer portfolios of mortgage-backed bonds. The move is a notable challenge to a ratings system that has long embedded itsdelf in the markets. Insurers are among the most important users of band ratings, collectiv ely holding some $3 trillion in rated bonds in their porfolios. ... The challenge from insurance regulators reflects the relentless criticism directed at ratings firms since the credit crisis began in 2007. ... Regulators say they have no plans now to move away from the leading agencies for corporate and other bonds considered less-difficult to rate. The regulators' action could subject them to criticism from consumer-advocacy groups that they are bending over backward to help insurers look good on paper, at the possible expense of policy holders", Leslie Scism & Aaron Lucchetti at the WSJ, 17 September 2009, link: http://online.wsj.com/article/SB125314357900717631.html.

"California Attorney General Edmund G. Brown Jr. began an investigation into three major US credit-rating companies and their role in the financial crisis, in part to determine whether the firms violated California law", Tess Stynes at the WSJ, 18 September 2009, link: http://online.wsj.com/article/SB125321131860920357.html.

"Throughout the financial crisis, the major credit-ratings firms were criticized for their overly rosy ratings of complex debt securities, which deteriorated soon after and led to billions of dollars of investor losses. ... The analyst, Eric Kolchinsky [EK], said [MIS] gave a high rating to a complicated debt security in January 2009 knowing it was planning to downgrade assets that backed the securities. Within months, the securities were put on review for a downgrade. ... The [MIS] spokesman declined to comment on the January rating that Mr. Kolchinsky questioned because a review of the matter 'is in progress.' Before he resigned, Mr. Kolchinsky was a managing director in a nonratings unit and wasn't involved in ratings of the securities in question. He was previously a Moody's rating analyst for six years and had experience with complex securities. ... In December, according to internal memos reviewed by Mr. Kolchinsky, Moody's executives approved changes to their ratings methodology that they expected to lead to the downgrades of many securities backed by corporate loans. The notes issued in January were tied to those types of securities, but Moody's analysts still gave the deal a high rating. ... In October 2007, Mr. Kolchinsky was told there was no role for him because the CDO ratings group was downsizing. He joined Moody's Analytics, a separate unit. ... A Moody's spokeman says that the firm 'has a strict nonretaliation policy' and that Mr. Kolchinsky 'has made an evolving series of claims of misconduct within the company and we have conducted multiple separate reviews.' In each case, Moody's 'found that his claims were unsupported,' the spokesman said", Serena Ng and Aaron Luchetti at the WSJ, 23 September 2009, link: http://online.wsj.com/article/SB125366267173132295.html.

"[EK], the former Moody's Corp. analyst who this week went public with allegations of inflated credit ratings, plans to tell a congressional committee on Thursday that the ratings industry is still hampered by conflicts of interest. He also believes the 'credit policy' and 'compliance' groups at [MIS] lack independence and are short-staffed, and analysts get 'routinely bullied' by business line managers, according to a draft of his testimony. ... Over the past year, he has given presentations within and outside Moody's on the causes and lessons of the financial crisis, detailing problems such as 'ignored incentives,' and overreliance on quantitative models, the highly complex nature of many financial instruments, and regulations that were inconsistently applied, according to a copy of his presentation", Serena Ng at the WSJ, 24 September 2009, link: http://online.wsj.com/article/SB125375108331535851.html.

"Credit-rating firms came under pressure as lawmakers and regulators renewed scrutiny of the ratings process. ... A Moody's spokesman said the company 'takes very seriously all allegations of impropriety,' and a review into Mr. Kolchinsky's most recent claims is in process. The spokesman said Mr. Kolchinsky's previous claims were found ny Moody's to be unsupported. ... [EK] also wrote that he fears that conflcits of interest, which arise bwecause Moody's is paid by debt issuers to rate securities, have become worse in recent months. the group that rates complex securities takes 'analytical short-cuts in their quest for revenue,' he wrote", Serena Ng, Sarah Lynch and Leslie Scism at the WSJ, 25 September 2009, link: http://online.wsj.com/article/SB125382176881638625.html.

This is another example of why we need federalism. It will be more difficult to capture all 50 state insurance regulators than the "systemic federal regulator".

Brown, good luck.

Aren't we impressed with MIS internal investigations. Did John Ashcroft do them? David Kotz may have a place at MIS if he gets pushed out of the SEC. CPAs have had SAS 22 since March 1978, now superceeded by SAS 108. So? SAS seemed to prohibit retaliation against CPAs for holding differences of opinion. Hahahahahahaha.

What? Incentives Count? How dare you? Analysts getting "bullied"? It sounds like EK worked for a Big 87654 firm.

As long as ratings agencies are paid by issuers, the conflcts of interest will remain. It like how CPA firms are paid. I'm sure MIS takes allegations of impropriety seriously. After they become lawsuits.

Let's Kill Grandma

"Life settlements generally involve long-standing 'permanent' universal life and variable universal life insurance. These are the sorts of policies that were sold, not bought. ... As a dejected policy owner, you have three choices: You can pocket the meager cash-out value offered by the insurer. You can keep pouring money into the policy, maintaining the death benefit for your heirs. Or you can sell the policy to a stranger. ... The stranger buying you out is hoping you get flattened by a train, preferably the day after the deal closes. ... Downsides: Life settlements are labor-intensive, multimonth processes from which sellers usually emerge with a lot less than they would get in an efficient, transparent market. Sometimes they get hit with hefty tax bills. ... The process of receiving a life settlement is so complex and perilous, and it's so easy for policyholders to leave a lot of money on the table, that it's best to hire competent help. Bypass the legions of agents trolling the Internet and find an expert through a trusted attorney or other estate planning specialist. ... It's best to pay your helper a flat or hourly fee. Compensate him purely for doing a deal and you'll increase the chance it will be a bad one. ... Investors in life settlements are typically seeking 14% to 20% annual returns. To help them investors have traditionally followed the ghoulish practice of cherry-picking sellers with short life expectancies", William Barrett at Forbes, 5 October 2009.

No problem for the investor. To assure good life settlement returns, kill grandma. This looks like a wonderful opportunity for the mob.

40 Years of BTID

"Why is life so complicated? The list of culprits includes tax code writers, whoever it is who comes up with the rebate procedures for electronic gadgets, and life insurance salesmen. ... Now you have all kinds of enhanced features to contend with: Guaranteed Minimum Income Benefit, Return of Premium, Equity Linked Universal Life, Lifetime Withdrawl Guarantee. ... Buy level-payment term insurance. This product has a flat annual rate, no cash value at the end and no decisions for you to make except to send in the premiums. ... The reason sales agents don't push term insurance is that it's so simple and so easy on comparison shoppers, and as a result so cheap that they can't make a living off the commissions", William Baldwin (WB) at Forbes, 5 October 2009.

I agree with WB. For 40 years it's been BTID, buy term, invest the difference. The more complicated a financial product is, the more laden with fees.

Experts? Huh?

Mr. [Orman] Wilson, the owner of 19 coin-operated car washes in Houston, says he relied on four advisers, including a [CPA], to set up a plan that received approval from the [IRS]. Then, in late 2007, the IRS found fault with the plan and assessed it $250,000--plus special penalties of $1.2 million. ... National Taxpayer Advocate Nina Olson, an IRS employee charged with protecting taxpayers' rights, has said the fines 'have the effect of bankrupting middle-class families who had no intention of entering into a tax shelter.' ... All these plans were funded with cash-value life-insurance policies. ... And the owners relied on experts, who often received commissions, to help them through the maze of laws and certify that the plans were correct. ... Some affected taxpayers have filed lawsuits naming life insurers and advisers who sold and sponsored these plans, including American General Life Insurance Co., Indianapolis Life Insurance Co., Pacific Life Insurance Co., and Hartford Life & Annuity Insurance Co.", Laura Saunders at the WSJ, September 2009, link: http://online.wsj.com/article/SB125331489168624343.html.

This stinks. The IRS should levy these penalties on the plan designers. Of course, the IRS employees might want work in the insurance industry.

CSI Las Vegas?

"The accident, on June 12, 2002, might have been forgotten. But [Cynthia] Johnson woke up the next day with back pain. ... Meanwhile, her lawyer, [Robert] Vannah, filed suit against the driver who hit Johnson, asking for a minimum of $200,000 in damages. Unbeknownst to Vannah, the driver was a federal prosecutor who had been in his car on government business. ... But it would come to mean everything to her lawyer: Instead of facing a local defense attorney, Vannah was squaring off against Ruth Cohen, a seasoned lawyer in the US attorney's civil division. ... The scheme began in 1999 and lasted for at least six years, prosecutors charge. Business and court records and local press reports suggest that the group--which numbered about 30--colluded in hundreds of suits that yielded hundreds of millions of dollars in settlements. According to government evidence, the group coordinated their testimony as expert witnesses, lied under oath, protected one another from malpractice lawsuits--even after the surgeries left a few patients paralyzed--and ate away at the plaintiffs; settlement money with kickbacks disguised as contingency fees. ... After five years of FBI investigation, three indictments, a highly publicized trial, and testimony from two complicit surgeons given immunity, no one has been found guilty. ... Vannah and others claim the real collusion in the case is between the prosecutors and the insurers. ... The medical mafia distributed millions of dollars to its members, prosecutors have charged. ... At trial, [Noel] Gage's lawyers skewered the prosecution, arguing that the case boiled down to an accusation that Gage had netted his client only $1.3 million. ... The local press corps shredded the two doctors. ... Calling government investigators 'despicable, dishonest human beings,' [Gage] says they have not proved 'one scintilla of criminality.' ... Ruth Cohen, who has left the US attorney's office and is now in private practice, wonders whether prosecutors arrived 'too late' to change anything", original italics, my emphasis, Katherine Eban at Fortune, 31 August 2009.

About 15 years ago Fortune wrote about the Ventura County, California DAs office being taken over by insurance companies which had it spend a lot of time investigating insurance frauds to the exclusion of other crimes. What else is new? $1.3 million, only 19% of my Blankfein test. Forget this DOJ. Hundreds of millions. Hmm, didn't our Goldman Sachs (GSG) friends get $12.9 billion from AIG? Cmon, Nevada US attorney. You can find some overt act GSG commited in your district to take jurisdiction. Look hard. Coordinated their testimony and such. Are these guys Feds? Collusion between insurers and the Feds? How dare you? Justice is blind. Conspiracy cases involving accidents do occur, like US v. Perez, 489 F2d 51 (5th Cir., 1973). This does not look like Perez. Millions of dollars? Big deal. Kickbacks? Look at Ashcroft's deal, my 17 January 2008 post: http://skepticaltexascpa.blogspot.com/2008/01/justice-department-extortion-racket.html.

Non-Insurer Insurer?

"Next to a Chinese restaurant in Burlington, Vt., sits a quiet guardian of Wall Street--an obscure insurance company that is supposed to protect big-money investors in the event of a catatrophic failure of a major brokerage firm. ... Now, after years in the shadows, the insurer, the Customer Asset Protection Company, could finally be put to the test, and questions are starting to swirl. ... If it were overwhelmed by claims, the banks and brokerage companies that own Capco, as it is known, could end up owing billions of dollars. ... Officials at the New York State Insurance Department are concerned about the company's ability to withstand the Lehman bankruptcy, the largest in history. ... The state is examining whether the company sold policies without the means to cover them, according to a person with direct knowledge of the inquiry who had signed confidentiality agreements. ... Capco was created in 2003 by Lehman and 13 other banks and brokerage companies as a kind of marketing tool. ... Capco, which is private, is something of a financial mystery, Its members include Wall Street giants like Morgan Stanley, and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant. ... Although Capco's finances were never disclosed publicly, the company was initially given a high rating by Standard & Poor's. ... 'Right away, the whole Capco thing just did not pass the smell test,' said Robert Meave, an outside consultant for Schwab at the time, who evaluated the insurance company", my emphasis, Zachery Kouwe at the NYT, 31 July 2009, link: http://www.nytimes.com/2009/07/31/business/31insure.html.

Another Wall Street scam. With lots of intellectual firepower, do we believe no one saw Capco did not operate on a sound actuarial basis? Where are the indictments? Capco went from NY to Vermont to avoid dicslosure. This should be admittable to show "consciousness of guilt". Preet Bharara, where are you? Capco in effect, was an "advance fee scam". How will Goldman have Zimbabwe Ben bail it out of this?

Double Tax Deferred!

"At stake: whether to continue paying AIG an annual 1.25% of assets to manage their 401(k) plan as part of an insurance contract, or switch mutual funds costing a third less. No surprise that the proposal to convert passed easily. ... Or, more aptly, the plans they were sold by people motivated by lavish commissions. Many hyped the product as a low-or no-cost proposition for employers while glossing over the fees charged to employees. A successful ruse it is. All told, insurers have lured 18,000 companies into parking $185 billion of 401(k) assets inside group annuities and similar contracts, according to an analysis by Larkspur Data Resources of plans with under $25 million in assets. 'Insurance companies cater to the smaller, less sophisticated part of the market,' says Robert Prall, managing partner of Rx Investment Solutions, which advises companies on how to build low-cost 401(k) plans, 'Every time we've gone into a company that has a group variable annuity contract, no one has really understood how it worked.' ... 'When it comes to fee abuse in retirement plans, you can put group annuities at the top of the list,' says Daniel Maul, an investment advisor in Seattle, Wash. who helps small firms set up 401(k) programs. ... The fact that annuities may be tax-deferred is irrelevant inside a retirement account, which is tax-deferred no matter how it is invested. ... The fact that group annuities are sold at all is largely a function of muddled 401(k) regulation. ... While insurance salesmen are free to present themselves as honest brokers, they are not required to regard themselves as fiduciaries with a legal obligation to put plan participants' interests first. Some insurers, including New York Life, refuse to offer group annuities", original italics, Scott Woolley at Forbes, 13 July 2009.

I kid you not. I have seen pension administrators brag about keeping 401(k) money in group annuities as they are "double tax deferred". Apparently sales hype these ignoramuses got. If Teresa Ghillarducci wants to crusade against 401(k) abuses, here is a good place to start. Ban future sales of group annuities to tax deferred plans.

Are Insurers Next?-11

"Thanks, but no thanks. That is the message some insurers sent Friday to the Treasury Department after they finally got word that they were approved for federal assistance under its Troubled Asset Relief Program, or TARP. ... 'You don't take TARP unless there's some weaknesses. It's not the happiest money in the world,' said Andrew Kligerman, an insurance-industry analyst at UBS. For months, insurers lobbied the government, while the companies, and their stockholders, waited for any sign that the capital might be coming. ... By the time the Treasury delivered the preliminary approvals, though, market conditions had changed. Lately, it has become easier for many firms seeking to boost capital to sell shares or borrow money from private investors. ... Meanwhile, corporate executives have seen firms that do take TARP money come under government and public scrutiny. Now efforts are under foot at several banks to repay TARP funds", my emphasis, Liam Pleven and Damian Paletta at the WSJ, 16 May 2009.

Shocking. A TARP funds recipient could "come under ... public scrutiny". How dare Joe Sixpack wonder where these billions are going.

Saving Sergeant 401(K)

"If ever there were a product whose time has come, this would seem to be it: a guarantee that you won't lose the money you've amassed in your 401(k) as you near retirement, no matter what happens with the market. And you can convert that money into a stream of paychecks that will last your entire life. ... For one thing, insurers can't promise too much, or they risk damaging their own financial health. ... And that highlights a big irony. Last year's market slide showed that there's a great need for guaranteed 401(k) products. But it also showed the vulnerability of the insurers who craft these offerings. And it raised questions about how well insurers understand the risk of dealing with complex financial instruments--such as the ones used to guarantee investments. ... Before the market's slide, 'we would talk to plan sponsors, and the conversation was around when and why' to launch these guarantees, [Vivek Agrawal, a McKinsey partner, said]. Today, 'the case for guarantees is clear, but the big question now is, 'Whose guarantee can I count on?' ... Interest in these plans is growing. ... Manulife Financial Corp.'s ... plan promises to protect the amount participants invest--the 'benefit base'--in eight designated stock-and-bond funds. Once a year, on the participant's anniversary date, if the market value of the fund investment with the guarantee is higher than the benefit base, the benefit base is increased to equal the market value, locking in the gains. ... Workers can start withdrawing 5% of the base annually as early as ago 59 1/2, provided they had the guarantee in place for at least five years. The plan charges 0.35% of the account value annually, on top of investment-management fees of 1.01% to 1.3%. ... Before [Manulife] offers it to its existing 401(k) base of 43,000 plans, [Edward Eng of Manulife] says, 'we want to ensure the underlying business assumptions are borne out through real-life experience.' ... The guarantees use financial derivatives to bet against stock-market indexes. The idea is that when the market falls, the hedges gain in market value--and thus protect participants' assets.", my emphasis, Leslie Scism at the WSJ, 4 May 2009.

See Theresa Ghillarducci (TG), the market doesn't need you. I last referred to TG on 23 December 2008, link: http://skepticaltexascpa.blogspot.com/2008/12/ben-franklin-3.html. please note. Guarantees? Locked in gains? Whatever these things will be, they will look a lot like equity-indexed annuities, my 2 January 2009 post: http://skepticaltexascpa.blogspot.com/2009/01/with-little-help-from-my-friends-2.html.

Are Insurers Next?-10

"The Treasury Department has decided to extend bailout funds to a number of struggling life-insurance companies, helping an industry that is a lynchpin of the US financial system, people familiar with the matter said. ... The news will come as a relief to a number of iconic American companies that have suffered big losses made worse by generous promises to buyers of some investment products. Shares of life insurers have fallen more than 40% this year. Their troubles led to a string of rating-agency downgrades that, in a vicious cycle, made it more difficult for some insurers to raise funds. ... If massive numbers of customers sought to redeem their policies, it could cause a cash crunch for some companies. ... The decision by the Treasury Department adds a third industry to the banks and auto companies that have already received bailouts from the government. ... Any life insurer that gets TARP funds will have to comply with strict executive compensation rules required by Congress. ... Hartford and Lincoln have applied for TARP funds. Genworth said it has applied with the Office of Thrift Supervision to approve its thrift purchase. ... Treasury had said last year that life insurers could be eligible for TARP funds if they owned bank-holding companies, but it hadn't officially decided to give funds to these companies as it focused much of its energies on banks and auto makers. ... Life insurers have been waiting several months to learn whether they would get federal funds. Many have resorted to contortions to bolster capital as they awaited word. Hartford recently said it plans to infuse $20 million into a cash-strapped Florida thrift it agreed to purchase for $10 million to qualify for federal aid under TARP", my emphasis, Scott Patterson and Deborah Solomon at the WSJ, 8 April 2009.

During the S&L crisis I saw home builders buy S&Ls to use the S&Ls to finance their construction on favorable terms. Look at the perverse incentives TARP has created for life insurers.

Are Insurers Next?-9

"Once a seemingly stable sector, life insurers are looking like a concentrated bet on the broader market. ... Shares of life insurers have come under pressure in recent months due to weakness in their portfolios of bonds and turmoil in their variable-annuity products--retirement investment products that become more costly for companies that sell them when stocks fall sharply. ... Moody's ... said the risk of further losses on Hartford's portfolio 'is meaningful in view of unsettled markets and deteriorating economic conditions.' ... For some time, life insurers' fates seemed more stable than those of banks, because they tend to invest in historically safe assets such as corporate and municipal bonds. But lately the market seems to expect that more writedowns are inevitable, especially on the commerical real-estate securities some companies snapped up. ... 'If the market takes another steep decline, many of these companies would have little to no excess capital,' said Barcalys Capital analyst Eric Berg. 'If on top of that rating agencies downgrade large numbers of investment grade bonds, the situation could become grim.' ... On Monday, Lincoln said it entered an agreement to cede a large block of life-insurance assets to Commonwealth Annuity & Life Co., a unit of Goldman Sachs Group Inc. That move will proivde Lincoln with about $240 million in capital relief, primarily from funds it has set aside for the policies, according to Lincoln", Scott Patterson at the WSJ, 31 March 2009.

This industry and its accounting bear watching.