Insurance Claims And Issues

Credit Default Swaps a/k/a Credit Insurance Target of Antitrust Investigation.

     Markit Group Holdings provides information about Credit Default Swaps and other Derivatives to approximately 300 firms trading in them.  These firms are sellers of such Derivatives.  "Markit collects pricing information from the largest players in the derivatives industry, and then provides it to more than 300 financial firms that use it to determine the prices of similar contracts in their own books."  Eric Dash, "Derivatives Are Focus of Antitrust Investigators" p. B1, col. 6 (New York Times Nat'l ed., "Business Day" Section, Wed., July 15, 2009).   The majority owners of Markit are Bank of America, Goldman Sachs, JP Morgan Chase, and the Royal Bank of Scotland.  Id.

    The purchasers of CDS's and other Derivatives are apparently not provided this information, however.  The financial firms which sell them object to providing information about them.  Thus, the Antitrust investigation.  See id.  See also Rob Cox, Antony Currie and Dwight Cass, "Derivatives Inquiry," Breakingviews.com, published on p. B2, col. 1, New York Times Nat'l ed., "Business Day" Section, Wed., July 15, 2009.  Disclosure of at least some CDS's is among the provisions of the current Administration's proposals for regulating Derivatives.  See generally Edmund L. Andrews, "Unresolved Questions After Hearing With Geithner" p. B3, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, July 11, 2009).

    Parenthetically, without proposing anything like an outright ban on Derivatives which is urged by many economists, the current Administration has proposed greater Reserves in order to handle the kinds of claims that may be made upon them -- and which are at the heart of the current Great Recession.  Id.

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"Stress Test" Results and Credit Default Swaps.Credit Insurance Policies.

    "Stress test" results have been released by the Federal Reserve Board in 37 pages of text, charts and graphics, plus 1 cover page:  Download Stress Test Results.050709.

    In a continuous revelation of a secret hidden in plain view, the results are clear that Credit Default Swaps (CDS's) and other "derivatives" offer intolerable risk to the larger economy.  See  Floyd Norris, "High & Low Finance / Findings, But No Final Word" p. B1, col. 1 (New York Times Nat'l Ed., "Business Day" Section, Friday, May 8, 2009):  "We know that there could be further losses on mortgage-backed securities -- despite claims by many banks that the securities have already been marked down to absurdly low levels."  See also Louise Story and Eric Dash, "The Great Divide/Results of Bank Stress Tests Split the Financial Landscape" p. B1, col. 2 (New York Times Nat'l Ed., "Business Day" Section, Friday, May 8, 2009).

    CDS's are now widely recognized as unregulated Credit Insurance unbacked by Capital-Reserves.  E.g., post here of March 18, 2009 and previous posts listed in it.  See also related posts on April 1, 2009 and on April 16, 2009.

    The intolerable risk of CDS's to the larger economy is that Federal Taxpayers will pay the freight for the ride taken by a few, who immediately cashed in the checks they were paid for selling the unregulated, uncapitalized CDS's.  See Mary Williams Walsh, "A.I.G. Cuts Loss Sharply to $4.35 Billion in First Quarter" p. B5, col. 1 (New York Times Nat'l Ed., "Business Day" Section, Friday, May 8, 2009).

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Hartford Changes Accounting, Announces Transformed Financials.

    Before The Hartford and other corporations changed their mark-to-market accounting values, The Hartford in particular was headed for a huge loss.  The large loss would have followed these recent developments:

    1.  The National Association of Insurance Commissioners repealed a requirement that certain Insurance Companies maintain a high level of Reserves sufficient to meet claims.  The repeal of the Reserves requirement was particularly sought by Life Insurance Companies.  The Hartford got about $1,000,000,000.00 or $1 Billion "of regulatory relief from capital and reserve requirements meant to protect policyholders" in this way.  See David S. Hilzenrath, "Accounting Changes Boost Hartford's Books" (Washington Post Online, Friday, May 1, 2009).  

   2.  The Hartford reportedly is looking at corporations within its group which it can sell to raise capital.  Id.

  3.  In addition, The Hartford recently announced that it will not issue new business either in Japan or in the U.K.  Id.

  After many large corporations changed to mark-to-management accounting values instead, they were able to release rosier reports on their financial condition.  See Joe Nocera, "Talking Business/Same Data, Conflicting Forecasts" (New York Times Online, Saturday, May 2, 2009).  This included The Hartford, which reported "a pre-tax gain of $550 million" partly due to the change in accounting values.  Even with these changes, it reported a loss for 1Q 2009 of $1.2 Billion.  David S. Hilzenrath, supra. 

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Bond Insurance Company Sues Insured it Issued Credit Default Swaps.

    MBIA issued a press release dated April 30, 2009 announcing a lawsuit which it and its subsidiary, LaCrosse Financial Products, LLC filed against their insured.  The defendant is Merrill Lynch, their Insured-Counterparty.  See also Jody Shenn, "MBIA Sues Merrill Lynch Over Sub-Prime Debt Protection (Update 2)" (Bloomberg.com, Thursday, April 30, 2009).

    Although MBIA posted that the Complaint itself was available on its web site, it was not yet located there the last time I personally tried to find it there.  A search this date on the "SCROLL" or "Supreme Court Records On-Line Library" site provided by the New York State Supreme Court, where the suit was filed, reveals that "no documents have been scanned" on this case as yet.

    The alleged claims or causes of action identified in the press release are Misrepresentation and Breach of Contract.  MBIA and LaCrosse allege that they were fraudulently induced to issue Credit Default Swaps and other Insurance Policies to Merrill.  The Bond Insurance Company seeks the remedy of Rescission for all CDS's and Insurance Policies which were issued to Merrill, and Damages "where the CDS Contracts and related policies were issued to third party counterparties [insureds] other than Merrill Lynch."

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Mr. Warren Buffett, Economic Pearl Harbor Passed, But Derivatives Tick.

    Mr. Warren Buffett earlier in 2009 described the Great Recession of 2007 - 2009 as an "economic Pearl Harbor".  Before the annual convention of his chief corporation, Berkshire Hathaway, Inc., began on Saturday, May 2, 2009 he advised that the economic Pearl Harbor has passed but the war is not over.  "Buffett:  'Economic Pearl Harbor' Has Passed" (MSNBC.com, updated Friday, May 1, 2009 before the Berkshire Hathaway annual convention began).

    Perhaps indicative of the war that rages still, Berkshire is exposed to "derivative contracts, many of which are long-term bets that stock market indexes will rise and junk bond defaults will not go sky-high."  Id.  Derivatives contracts which are not tied to any insurable interest are hardly anything more than wagering contracts, it is clear.

    Reportedly, if the markets reached the same levels at which they stood even as late as December, 2008,Berkshire's derivatives contracts exposure would reach $13,000,000,000.00 or $13 Billion.  See id.

    For additional information on the business results reported by Berkshire Hathway for 2008, see its 2008 Annual Report here.

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"Insurance Companies, CDS's, Prove States Should Not Regulate," CEO Writes.

    Arguments in favor of a Federal regulator of Insurance Companies are presented by Tom Wilson, "Regulate Me, Please" p. A23, col. 2 (New York Times Nat'l Ed., Thursday, April 16, 2009).  Mr. Wilson is identified as the chief executive of Allstate Insurance Company.  Insurance Companies are regulated by the States.

    The arguments include the assertion that States "lack the expertise" to regulate complex securitized financial instruments.  See id.  So does everyone else, as we can see with our own eyes.  The Credit Collapse of 2007 - 2009 could not have happened without them.

    This is really an argument for no regulation at all.  If responsibility for regulation is shifted from those with experience at regulating Insurance Companies to those who have none, then there cannot be any regulation in any meaningful sense of the word, "regulation".

    As for financial creatures developed since 1980 or so, like Credit Default Swaps, if no-one can understand complex securitized financial instruments enough to regulate them, why would a Federal regulator be desired?  Why, especially, would this argument be made by an Insurance Company whose CEO writes that it did not trade in complex securitized financial instruments?

    To say again, this is really an argument for no regulation at all.  Business as usual benefitted some people very much, and most people not at all.  Business as usual is done.

    Parenthetically, this linked newspaper release contains a surprising admission.  The admission is that Credit Default Swaps were really Insurance after all, all these years.  Id.  The Insurance industry was among the crowd of once-supposedly smart people who used to say that Credit Default Swaps should not be regulated.  And that they were not "Insurance".  Certainly that CDS's should not be regulated by Insurance Commissioners.  Here is how many times the Insurance industry asked anyone to regulate Credit Default Swaps as Insurance:  _________.

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Goldman Returning Federal Funds?

    Newspapers report that Goldman Sachs wants to return the Federal Funds it received to bail it out in down times.  After it spent the Federal Taxpayers' money, now Goldman Sachs reportedly perceives itself as enjoying "up" times.  Also it does not want to be restricted from pursuing again the lines of success, bonuses and rewards it became used to.  See Louise Story, "Goldman Profit Tops Forecast, and a Share Sale is Planned" p. B1, col. 1 (New York Times Nat'l Ed., "Business Day" Section, Tuesday, April 14, 2009, published online under the headline, "Goldman Using Share Sale to Return Bailout Funds".

    The Treasury Department and the Federal Reserve are reportedly considering this request.  Their permission is required for Goldman Sachs and any other bailout patient, reportedly, to pay the Federal Taxpayer Funds back early.

    The payback demanded should include a good part of the $12,900,000,000.00 or $12.9 Billion which Goldman Sacked from AIG.  That amount was 100% of the face value of Credit Default Swaps or Credit Insurance Policy Limits by another name, which the Federal Government foolishly paid to Goldman through AIG.  See the post here on March 24, 2009, "Goldman Sacks Federal Treasury".  Now is the time to negotiate what before was not negotiated, but should have been.

    Further, Goldman's payback should also include its agreement to accept the market value or less of the remaining Credit Default Swaps it was issued by AIG, the face value of which was some $6 Billion.  See id.

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"Mark-to-Management" Change: Bankers' Credit Insurance Profit, Taxpayers' Expense.

   Current accounting rules binding investment houses including banks require so-called "assets" to be marked at current market value.  A lot of "assets" are insured by Credit Default Swaps, an unregulated form of Credit Insurance favored by large institutions like AIG. Presumably, even Credit Default Swaps will not pay more than an insured asset is worth. 

    Right now, and for awhile in the past, the market value of many of these toxic assets is just not as great as the people holding them purchased them for.  These people thought that they were so smart because they made so much money.  If they did not make as much money as they once thought they did, they would have to admit to themselves and to us that they were never so smart as all that.  That is an admission they cannot or will not make.

    The investment banks want to change current accounting rules accordingly.  The changes they want are known as "mark-to-management" accounting.  They want to value their "assets" at whatever price they put on the assets, regardless of what the market will bear.  See Floyd Norris, "Marketplace/Making Bank Losses Vanish" p. B1, col. 1 (New York Times Nat'l Ed., Business Day Section, Wed., April 1, 2009), published online with the headline, "Banks Are Set to Receive More Leeway on Asset Values".

    This change is obviously anti-capitalist.  They bargained for the market valuing their assets at the time that they laid out money for those assets.  Now they want to artificially inflate the value of those so-called assets.

    There is more than ego at work here.  The investment bankers want to be paid for their "assets" at a value equal to what they paid, or as close to that amount as they can get.  They want Credit Insurance to do this for them.  To say again, presumably not even Credit Default Swaps will pay a price greater than the "value" of the asset -- and these people want to change the rules to continue to overvalue their assets in the judgment of many.  At whose expense, it might well be asked?  The Federal Taxpayers have paid large amounts of money on account of AIG's Credit Default Swap insurance obligations -- even though there was no insured "loss" and at 100% of the "value" of those obligations as priced by the people who claimed them.  See "Goldman Sacks Federal Treasury," posted here on March 24, 2009.  These are the same people who insist on changing the accounting rules to keep their control over the "value" of these assets.  Marking down those assets may mark down the value or price which they are paid by Federal Taxpayers. 

    This is now how regulated Credit Insurance works.  It is not how even unregulated Credit Insurance ought to be allowed to work.

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N.Y. Times Concurs: Credit Default Swaps Are Unregulated "Credit Insurance".

    In an insightful piece of reporting by Gretchen Morgenson, "A.I.G.'s Bailout Priorities Are in Critics' Cross Hairs/Covering Foreign Institutions Further Upsets Some in U.S." p. B1, col. 2 (New York Times Nat'l Ed., Wed., March 18, 2009), the venerable New York Times and its highly respected Business Day columnist, Ms. Gretchen Morgenson, describe AIG's Credit Default Swaps.  The New York Times article never uses that term, however.  Instead, AIG's failed CDS's are described exactly as what they are:  Credit Insurance.  (One exception:  The CDS terminology is used in a box of "Credit Default Swap" information provided by AIG.)

    In previous posts here, I have carefully reviewed the evidence for and against Credit Default Swaps and they are clearly Unregulated Credit Insurance by another name.  For example, under the Category of "Credit Insurance" see posts on 12.15.08, 12.24.08, 01.07.09, 01.26.09, and 02.20.09.  (One or more of these posts may no longer be available in the typepad archives.)

    This makes a huge impact.  Credit Insurance is or should be regulated by the State Insurance Commissioners.  For example, the New York Insurance Superintendent was poised to regulate CDS's in New York that perform like Credit Insurance, as of the first of 2009.  If CDS's could have been regulated as Insurance, but were not and are still not regulated as Insurance, why not?  Good question.

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Fed Purchase Terms Revealed for AIG's Credit Default Instruments.

    The terms of the Fed's purchases of Collateralized Debt Obligations undertaken by AIG, and of Credit Default Swaps issued and guaranteed by AIG, have now been revealed.  The Fed apparently paid 100% of the declared value of these 'instruments'.  The parties that declared the value of these instruments were the parties that held them, called "counterparties" on Wall Street and called Policyholders under these unregulated, unreserved Credit Insurance Policies,  See Henny Sender, "AIG Saga Shows Dangers of Credit Default Swaps" (Financial Times.com, Friday, March 6, 2009).

    Since the "counterparties" were fully paid off, "the process was reasonably harmonious."  (Why would it not be, at least from the point of view of the parties receiving 100% of the money they claimed?)  It is also reported that the Fed, AIG and the holders were able to avoid "valuation disputes."  Id.  (I will bet I guess they were harmonious, since they apparently avoided anything resembling a negotiation.)

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