Tuesday, October 28, 2008

No Bailout for the Insurance Industry

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.

Thanks for checking in…


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K said...

This had very good information. Insurance companies sometimes get looked over but they are so important.

John Stryker said...

Not that I spend my time following your somewhat off-based comments here, I occasionally check in to get a chuckle out of you animated yet dry sense of humor you try to bring. I appreciate your "revision" of "Mexican Truckers" after my comments. But reading your posts does confirm to me that - opinionated is not bad - bad babbling on about issues in the manner you like to is rather boring, but interesting too. I must say this latest post is just that - interesting. Commenting on your retirement portfolio is funny, as seeing you are at the helm of a financial empire I sincerely doubt that you have much to worry about. Further, your take on the entire "bailout" situation is way off base. While I agree with you (I think I do - your babbling twisting and turning makes it difficult to know) that the Government medling in private sectors is a bit off base, it must be said that if this transaction didn't happen, we would all be screwed. Including yourself, and your precious retirement portfolio. This about it... I don't think any educated American relishes the idea of forking over that kind of cash, unfortunately AIG has plunged into the situation they have. You're right, they shouldn't have dabbled in such other areas as you note, but the damage is done. And if your precious retirement account is going to be salaged, I guess Paulson will have to make the decisions he has. Again, I don't agree with how this whole thing is playing out, but for goodness sake I don't think you or the average American citizen wants to see a replay of the Great Depression. In that case, brace yourself for many a suicide as folks begin leaping out upper floor windows. So, I think you should step back here, as an educated business person, and re-evaluate your position and babbling of what is going on here.

Darvin Dowdy said...

Ed can you give us a post on the latest w/the 18.cent per mile Mexican Truckers? In my view its just a matter of time before a large chunk of the U.S. trucking industry is operated out of northern Mexico. Oh, we'll have dispatchers here in the U.S. working in high-rises, etc. but the industry, yards, etc as we know them will be history. I'm predicting 5 years. Whats your take on it? From your perspective? Darvin Dowdy

bhargava said...
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Bhima shankar said...

this is the nice article. i like ti very much. thanks fro sharing.