I don’t spend a lot of time analyzing cause and effect relationships in the stock market. Lately, however, I have noticed one fairly predictable correlation. Every time Treasury Secretary Paulson opens his mouth my retirement portfolio declines by another couple of percentage points.
Since Congress passed the bailout bill most Americans have assumed that Secretary Paulson now has the tools he needs to stabilize our financial system. Unfortunately, as if to undermine the very confidence we’ve reluctantly placed in him, he keeps dredging up new things to worry about.
The Wall Street Journal reported this past weekend that Secretary Paulson may now extend the bailout to the insurance industry. To which I ask, WHY? The insurance industry neither deserves nor requires any taxpayer assistance.
The corporations most of us regard as large insurers are actually anything but insurance companies. They are holding companies that operate one or more insurance companies (and often other types of businesses too) as subsidiaries. These holding companies frequently pursue complicated investment strategies funded by dividends extracted from their insurance company subsidiaries. It’s not about writing policies and paying claims at all. It’s about generating a cheap source of cash to finance fancy investment activities. Warren Buffett loves GEICO, but do not think for a minute that he gets his kicks from repairing damaged automobiles?
Owing to the high flying ways of AIG, Wall Street became enamored with insurance holding companies. For a while their exotic investment strategies produced an earnings stream that seemingly exceeded the sum of their parts. They weaved and weaseled their way into the fabric of our financial system. They chased ever higher returns to keep Wall Street happy. They became mortgage lenders and hedge fund operators and owners of aircraft leasing companies. Then it all blew up; or so it seems to Secretary Paulson.
Actually it hasn’t. Unlike banks, insurance holding companies own very healthy and reasonably marketable assets in the form of their insurance company subsidiaries. If all else fails a holding company can raise cash by selling its subsidiaries. In AIG’s case, an orderly sale of its entire portfolio of insurance companies (many with valuable brand names) could very well have generated more cash than it received via the taxpayer loan. Heck, at the end of the day even the shareholders might have walked away with something.
As it stands, the quest to keep AIG intact has placed taxpayers at risk for some $90+ billion and counting. We do not need to repeat this mistake industry wide. I know this crowd. Those insurance CEOs now whispering in Secretary Paulson's ear care more about their corporate jets than they do about the financial system or the taxpayers. Let the private sector sort this mess out.
Hey! The Dow closed up 900 points today. Secretary Paulson must have cancelled his press conference.
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