The U.S. House of Representatives will vote next week on repealing the antitrust exemption for health insurers, but Democrats remained uncertain Tuesday on how to proceed on a broader healthcare overhaul.
Senate Democratic leader Harry Reid and House Speaker Nancy Pelosi during a Tuesday meeting reached no decisions on the sweeping healthcare legislation that has been in limbo since Democrats lost their crucial 60th Senate vote in a Republican election upset in Massachusetts last month.
"We have a number of options,'' Reid told reporters after the meeting with Pelosi. "We are going to proceed. We just don't know at this time how we are going to proceed.''
Democratic leaders are searching for a strategy to merge the two versions of the healthcare bill passed last year by the House of Representatives and Senate and pass it again before sending it to President Barack Obama for his signature.
The repeal of the antitrust exemption for health insurance companies was included in the House-passed healthcare overhaul bill but not in the Senate's version. The repeal has been a top priority for some House Democrats.
Health insurers for about 65 years have been exempt from federal antitrust laws, which are designed to protect consumers from price fixing and other anti-competitive acts. The insurance industry has said the exemption is warranted because health insurers are regulated by states.
But a number of lawmakers and consumer groups support repeal of the exemption. They argue that states often lack the resources to regulate the insurance industry effectively.
"Eliminating this industry giveaway will create more choice for consumers and create more competition for insurance companies,'' said Representative Louise Slaughter, chairwoman of the House Rules Committee and one of the authors of the repeal language included in the broader House bill.
"Getting this done is critical to getting real meaningful health insurance reform that will benefit all Americans by lowering costs,'' she said.
'HAPPY TO TAKE A LOOK'
If the House passes the antitrust exemption repeal bill, the Senate would have to approve it before sending it to Obama to sign into law. "We'll be happy to take a look at it,'' Reid said.
Pelosi spokesman Nadeam Elshami said the House antitrust vote scheduled for next week did not signal the House would break up the broader healthcare reform measure and try to move it piecemeal through Congress.
That has been one suggested strategy for the healthcare bill. Under another strategy, the House would pass the Senate bill without changes, eliminating the need for another Senate vote, and use a process known as budget reconciliation to make final changes in the two measures.
That process requires only a simple majority of 51 votes in the Senate.
Obama has urged lawmakers to pass the healthcare bill but has shifted his domestic agenda to make job creation and economic recovery his top priority.
"It's not over,'' Obama said of the healthcare debate during a town hall meeting in Nashua, New Hampshire Tuesday. "We just have to make sure that we move methodically and that the American people understand exactly what's in the bill.''
Reid said reconciliation remained an option for passing the bill, but refused to say if a strategy would be agreed upon before Congress leaves town for a one-week break at the end of next week.
"As I've learned, especially on healthcare -- no arbitrary deadlines. It just doesn't work,'' Reid said.
Wednesday, February 3, 2010
Monday, February 1, 2010
Travelers Sees Record Profits
The Travelers Cos. saw its fourth-quarter profits climb 60 percent, driven largely by investment gains.
The insurer posted record net income for the quarter of $1.285 billion and full year net income of $3.622 billion. It marked the best quarter for profits Travelers has seen since 2002.
“Our retention rates remained high and the impact of renewal rate changes on premiums remained positive across all three of our business segments,” said Jay Fishman, chairman and chief executive officer of Travelers.
Total revenue in the fourth quarter was $6.456 billion, up 11 percent from the year-ago period. The insurer saw a 4-percent decline in net written premiums from the fourth quarter a year ago, which the insurer attributed to reduced insured exposures due to lower levels of economic activity.
Travelers fourth-quarter combined ratio was 83.4, down from 85.9 in the fourth quarter of 2008. For the year, Travelers combined ratio was 89.2, down from 91.9 in 2008.
Travelers Business Insurance segment had a combined ratio of 78.8, down from 85.7 in the prior-year period. “Business Insurance achieved strong underwriting results in the quarter as evidenced by its combined ratio. Although the impact on net written premiums from the economic downturn remained evident during the quarter, we once again produced positive renewal rate changes, strong retentions and stable new business levels,” said Brian MacLean, president and chief operating officer.
Travelers Personal Insurance segment had a combined ratio of 90.4 in the fourth quarter, up from 85.6 in the prior-year period. Personal Insurance net written premiums for the fourth quarter increased 3 percent to $1.735 billion. The company attributed the increase to continued positive renewal premium changes and strong retention rates. “Although we experienced a seasonality impact within our automobile business, we are pleased with our rate levels and new business quality,” MacLean said.
The insurer posted record net income for the quarter of $1.285 billion and full year net income of $3.622 billion. It marked the best quarter for profits Travelers has seen since 2002.
“Our retention rates remained high and the impact of renewal rate changes on premiums remained positive across all three of our business segments,” said Jay Fishman, chairman and chief executive officer of Travelers.
Total revenue in the fourth quarter was $6.456 billion, up 11 percent from the year-ago period. The insurer saw a 4-percent decline in net written premiums from the fourth quarter a year ago, which the insurer attributed to reduced insured exposures due to lower levels of economic activity.
Travelers fourth-quarter combined ratio was 83.4, down from 85.9 in the fourth quarter of 2008. For the year, Travelers combined ratio was 89.2, down from 91.9 in 2008.
Travelers Business Insurance segment had a combined ratio of 78.8, down from 85.7 in the prior-year period. “Business Insurance achieved strong underwriting results in the quarter as evidenced by its combined ratio. Although the impact on net written premiums from the economic downturn remained evident during the quarter, we once again produced positive renewal rate changes, strong retentions and stable new business levels,” said Brian MacLean, president and chief operating officer.
Travelers Personal Insurance segment had a combined ratio of 90.4 in the fourth quarter, up from 85.6 in the prior-year period. Personal Insurance net written premiums for the fourth quarter increased 3 percent to $1.735 billion. The company attributed the increase to continued positive renewal premium changes and strong retention rates. “Although we experienced a seasonality impact within our automobile business, we are pleased with our rate levels and new business quality,” MacLean said.
Friday, January 29, 2010
Louisiana Comp Costs Per Claim 35% Higher than Most States
The costs per all paid workers’ compensation insurance claims in Louisiana averaged 35 percent higher than the typical study state, according to a Massachusetts-based research group that studies workers’ comp.
In its “CompScopeBenchmarks for Louisiana, 10th Edition,” the Workers Compensation Research Institute (WCRI) found that injured workers in Louisiana were off the job longer than in other states with similar workers’ compensation benefit systems, resulting in higher-than-typical indemnity benefits per claim than in other study states, even though the workers’ weekly benefits were capped at lower levels in Louisiana.
In addition, medical costs and expenses per claim were among the highest of the 15 states in the study.
The study found that indemnity benefits per claim with more than seven days of lost time were 36 percent higher than the typical study state as a result of a longer duration of temporary disability.
WCRI reported that injured workers in Louisiana were off work 34 weeks on average, which was nine to 10 weeks longer than Massachusetts and Pennsylvania and 15 weeks longer than Michigan.
Medical costs per claim were 20 percent higher than in the typical study state, the result of higher utilization and higher nonsurgical prices paid. In addition, the duration of medical treatment was 6.5 weeks (16 percent) longer than in the median study state.
Despite little change in the medical fee schedule rates since 1994, the 2006 medical fee schedule in Louisiana was higher than the median of 42 states with fee schedules for all service groups except surgery.
Payments per claim for hospital outpatient services also were higher than the median study state, WCRI said. Hospital inpatient payments per claim, however, were lower compared to other study states.
Expenses to manage claims were among the highest of the study states, including higher than average medical cost containment expenses per claim, defense attorney payments, and medical-legal expenses per claim.
WCRI reported defense attorney payments per claim with more than seven days of lost time were the highest among the 15 study states, at an average of nearly $6,500 per claim with defense attorney payments greater than $500.
In its “CompScopeBenchmarks for Louisiana, 10th Edition,” the Workers Compensation Research Institute (WCRI) found that injured workers in Louisiana were off the job longer than in other states with similar workers’ compensation benefit systems, resulting in higher-than-typical indemnity benefits per claim than in other study states, even though the workers’ weekly benefits were capped at lower levels in Louisiana.
In addition, medical costs and expenses per claim were among the highest of the 15 states in the study.
The study found that indemnity benefits per claim with more than seven days of lost time were 36 percent higher than the typical study state as a result of a longer duration of temporary disability.
WCRI reported that injured workers in Louisiana were off work 34 weeks on average, which was nine to 10 weeks longer than Massachusetts and Pennsylvania and 15 weeks longer than Michigan.
Medical costs per claim were 20 percent higher than in the typical study state, the result of higher utilization and higher nonsurgical prices paid. In addition, the duration of medical treatment was 6.5 weeks (16 percent) longer than in the median study state.
Despite little change in the medical fee schedule rates since 1994, the 2006 medical fee schedule in Louisiana was higher than the median of 42 states with fee schedules for all service groups except surgery.
Payments per claim for hospital outpatient services also were higher than the median study state, WCRI said. Hospital inpatient payments per claim, however, were lower compared to other study states.
Expenses to manage claims were among the highest of the study states, including higher than average medical cost containment expenses per claim, defense attorney payments, and medical-legal expenses per claim.
WCRI reported defense attorney payments per claim with more than seven days of lost time were the highest among the 15 study states, at an average of nearly $6,500 per claim with defense attorney payments greater than $500.
Thursday, January 28, 2010
AIG Without Help Would Have Killed U.S. Economy, Say Paulson, Geithner
Former Treasury Secretary Henry Paulson and current Secretary Timothy Geither both told a skeptical congressional committee today that if U.S. action was not taken to bail out American International Group it would have been a catastrophe for the nation.
Their comments came at a hearing before the House Oversight and Government Reform Committee, which has questioned all elements of federal bank and U.S. Treasury actions to supply billions of dollars to bail out the insurance conglomerate and pay its bank trading partners in full for claims against depreciated assets.
Mr. Geithner was scrutinized about his role as Federal Reserve Bank of New York president before he became secretary and the FRBNY's steps to squash disclosure of how much the banks were getting.
Two lawmakers on the committee doubting his denials in that effort asked for his resignation.
Mr. Geithner said that Federal Reserve Board acted to bail out American International Group because it was “the only fire station in town.”
Republicans on the panel, in a report, have said the FRBNY), which Mr. Geithner headed in 2008, pushed through the bailout by the Federal Reserve that provided a bonanza to banks that were AIG trading partners. They attacked the decision to pay off AIG’s bank counterparties to complex and highly speculative collateralized debt obligations in full and not to press them to take “a haircut” and accept only a percentage of what was owed.
At the conclusion of the testimony from Mr. Geithner, who denied he was part of the FRBNY demands that AIG withold information about the 100 percent payout to bank counterparties Rep. Darrell Issa, R-Calif., the committee’s ranking Republican member, said he “no confidence” in the secretary and called for his resignation. He told him “you are either incompetent” or tried to cover up the details of what was going on through payoffs of the CDS [credit default swaps].”
Rep. John Mica, R-Fla., said Mr. Geithner had given "lame excuses" and asked, "Why shouldn't we ask for your resignation." Mr. Geithner said that was his right, but, he still takes pride in decisions made by federal banking officials.
Committee Chairman Edolphus Towns, D-NY, while complianing in opening remarks that, "In the case of AIG nobody got a haircut. Instead, everybody got a piggy bank full of taxpayers money, said after questioning Geithner, “I don’t know what else you could have done.”
Mr. Geithner testified it was “important to remember that the Federal Reserve, under the law, had no role in supervising or regulating AIG, investment banks,.." but Congress gave the Federal Reserve authority to provide liquidity to the financial system in times of severe stress, he added.“Given that responsibility, the Federal Reserve had to act,” he said, because the Federal Reserve was “the only fire station in town.”
The AIG bank trading partners had hedged their investment in collateralized debt obligations backed by U.S. residential mortgages through purchase of insurance through credit default swaps issued by AIG.
Mr. Geithner said that “imprudent risk-taking in better times” at AIG “meant that, when the financial cycle turned, AIG had hundreds of billions of dollars in commitments without the capital and liquid assets to back them up.”
He said such “excessive risk-taking should not have been allowed. But it was.”
He added, “Despite regulators in 20 different states being responsible for the primary regulation and supervision of AIG’s U.S. insurance subsidiaries, despite AIG’s foreign insurance activities being regulated by more than 130 foreign governments, and despite AIG’s holding company being subject to supervision by the Office of Thrift Supervision (OTS), no one was adequately aware of what was really going on at AIG.”
He defended the decisions of the FRBNY, the Board of Governors of the Federal Reserve and the U.S. Treasury by saying that the steps the government took to rescue AIG “were motivated solely by what we believed to be in the best interests of the American people.”
“We did not act because AIG asked for assistance,” he said. “We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks.
“We acted because the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses.”
Mr. Paulson called AIG “an unregulated holding company” and a “mismanaged and misguided enterprise.”
The former treasury secretary said, “Although the road to complete recovery is slow and unemployment is still high, had AIG failed I believe we would have seen a complete collapse of our financial system, and unemployment easily could have risen to the 25 percent level reached in the Great Depression.”
The committee as part of its inquiry is probing whether the FRBNY acted inappropriately in limiting disclosures that as part of the bailout arrangements AIG would be paying off the banks in full.
“The rescue of AIG was necessary, and I believe that we in government who acted to rescue it—including [Treasury] Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and me—acted properly and in the best interests of our country,” he said.
Mr. Paulson said AIG needed rescue because it was “incredibly large and interconnected,” it was “seriously underregulated,” and because “it could not have been effectively wound down.”
Specifically, he said it had a $1 trillion dollar balance sheet; a massive derivatives business that connected it to hundreds of financial institutions, businesses and governments; tens of millions of life insurance customers; and tens of billions of dollars of contracts guaranteeing the retirement savings of individuals.
“If AIG collapsed, it would have buckled our financial system and wrought economic havoc on the lives of millions of our citizens,” Mr. Paulson said.
The second reason was that it was not effectively regulated. “Although many of AIG’s subsidiaries—including its insurance companies—were subject to varying levels of regulation, the parent entity was, for all practical purposes, an unregulated holding company.”
Consequently, there was no one regulator with a complete picture of AIG or a comprehensive understanding of how it was run. “It was not until AIG started to fail that regulators began to understand how badly managed it had been and how much the toxic aspects of parts of its business had infected otherwise healthy parts,” Mr. Paulson said.
Third, AIG could not be effectively “wound down,” he said. “Unlike failed depository institutions which can be taken over by the FDIC with little or no harm to depositors, or the GSEs [government sponsored enterprises] which were seamlessly placed into conservatorship by Treasury and the Federal Housing Finance Agency, there was—and is—no resolution authority available to wind down a failing institution like AIG.
“The only option is bankruptcy, a process that is simply not capable of protecting the millions of Americans whose finances are intertwined with AIG’s,” he said.
Mr. Paulson commented, “I do not mean to say that I am happy that we needed to intervene,” noting that taxpayer money should not have to be spent to save a “mismanaged and misguided enterprise.”
But, he added, “the fundamental problem lies not in how we intervened, but in why we needed to intervene.”
He said the U.S. needs to modernize its regulatory structure by creating a systemic risk regulator and resolution authority so any large firm that fails can be liquidated without de-stabilizing the system.
“Large financial enterprises in this country will always play a role that is essential to our economic growth, but they must only be permitted to grow and interconnect throughout our economy under careful oversight and with a mechanism for allowing those connections to be broken safely,” he added.
Meanwhile, Federal Reserve Board Chairman Ben Bernanke said stabilizing AIG, not the financial health of the trading partners, was the reason the Fed decided to pay off the AIG credit default swaps at par.
His statement came in a written response to Rep. Issal, who oversaw the minority report suggesting AIG bank counterparties were paid too much and the FRBNY and Federal Reserve attempted a cover up of bailout details.
Mr. Bernanke said, “The overriding motivating factor in structuring the payments to the counterparties was to relieve AIG of the destabilizing drains on its liquidity caused by the requirement to continue to post collateral as required by the CDS [credit default swaps] contracts.
“All counterparties were treated the same for payment purposes. Whether the individual counterparties were in relatively sound financial condition or not was not a factor in the decision regarding the amount paid to the counterparties or whether concessions should be sought from them.”
Mr. Geithner In response to a question, said the Fed had no legal or other authority to take any other action than it did in paying off the CDS. He said there was no way to put AIG in bankruptcy.
“To stand back and let it burn,” he said would be irresponsible and the Fed acted to protect the innocent through the bailouts and made an effort to reduce the cost to the American taxpayer to the lowest amount possible,.
He noted that the protections in place against bank bankruptcy do not exist for insurance companies.
Their comments came at a hearing before the House Oversight and Government Reform Committee, which has questioned all elements of federal bank and U.S. Treasury actions to supply billions of dollars to bail out the insurance conglomerate and pay its bank trading partners in full for claims against depreciated assets.
Mr. Geithner was scrutinized about his role as Federal Reserve Bank of New York president before he became secretary and the FRBNY's steps to squash disclosure of how much the banks were getting.
Two lawmakers on the committee doubting his denials in that effort asked for his resignation.
Mr. Geithner said that Federal Reserve Board acted to bail out American International Group because it was “the only fire station in town.”
Republicans on the panel, in a report, have said the FRBNY), which Mr. Geithner headed in 2008, pushed through the bailout by the Federal Reserve that provided a bonanza to banks that were AIG trading partners. They attacked the decision to pay off AIG’s bank counterparties to complex and highly speculative collateralized debt obligations in full and not to press them to take “a haircut” and accept only a percentage of what was owed.
At the conclusion of the testimony from Mr. Geithner, who denied he was part of the FRBNY demands that AIG withold information about the 100 percent payout to bank counterparties Rep. Darrell Issa, R-Calif., the committee’s ranking Republican member, said he “no confidence” in the secretary and called for his resignation. He told him “you are either incompetent” or tried to cover up the details of what was going on through payoffs of the CDS [credit default swaps].”
Rep. John Mica, R-Fla., said Mr. Geithner had given "lame excuses" and asked, "Why shouldn't we ask for your resignation." Mr. Geithner said that was his right, but, he still takes pride in decisions made by federal banking officials.
Committee Chairman Edolphus Towns, D-NY, while complianing in opening remarks that, "In the case of AIG nobody got a haircut. Instead, everybody got a piggy bank full of taxpayers money, said after questioning Geithner, “I don’t know what else you could have done.”
Mr. Geithner testified it was “important to remember that the Federal Reserve, under the law, had no role in supervising or regulating AIG, investment banks,.." but Congress gave the Federal Reserve authority to provide liquidity to the financial system in times of severe stress, he added.“Given that responsibility, the Federal Reserve had to act,” he said, because the Federal Reserve was “the only fire station in town.”
The AIG bank trading partners had hedged their investment in collateralized debt obligations backed by U.S. residential mortgages through purchase of insurance through credit default swaps issued by AIG.
Mr. Geithner said that “imprudent risk-taking in better times” at AIG “meant that, when the financial cycle turned, AIG had hundreds of billions of dollars in commitments without the capital and liquid assets to back them up.”
He said such “excessive risk-taking should not have been allowed. But it was.”
He added, “Despite regulators in 20 different states being responsible for the primary regulation and supervision of AIG’s U.S. insurance subsidiaries, despite AIG’s foreign insurance activities being regulated by more than 130 foreign governments, and despite AIG’s holding company being subject to supervision by the Office of Thrift Supervision (OTS), no one was adequately aware of what was really going on at AIG.”
He defended the decisions of the FRBNY, the Board of Governors of the Federal Reserve and the U.S. Treasury by saying that the steps the government took to rescue AIG “were motivated solely by what we believed to be in the best interests of the American people.”
“We did not act because AIG asked for assistance,” he said. “We did not act to protect the financial interests of individual institutions. We did not act to help foreign banks.
“We acted because the consequences of AIG failing at that time, in those circumstances, would have been catastrophic for our economy and for American families and businesses.”
Mr. Paulson called AIG “an unregulated holding company” and a “mismanaged and misguided enterprise.”
The former treasury secretary said, “Although the road to complete recovery is slow and unemployment is still high, had AIG failed I believe we would have seen a complete collapse of our financial system, and unemployment easily could have risen to the 25 percent level reached in the Great Depression.”
The committee as part of its inquiry is probing whether the FRBNY acted inappropriately in limiting disclosures that as part of the bailout arrangements AIG would be paying off the banks in full.
“The rescue of AIG was necessary, and I believe that we in government who acted to rescue it—including [Treasury] Secretary Timothy Geithner, Federal Reserve Chairman Ben Bernanke and me—acted properly and in the best interests of our country,” he said.
Mr. Paulson said AIG needed rescue because it was “incredibly large and interconnected,” it was “seriously underregulated,” and because “it could not have been effectively wound down.”
Specifically, he said it had a $1 trillion dollar balance sheet; a massive derivatives business that connected it to hundreds of financial institutions, businesses and governments; tens of millions of life insurance customers; and tens of billions of dollars of contracts guaranteeing the retirement savings of individuals.
“If AIG collapsed, it would have buckled our financial system and wrought economic havoc on the lives of millions of our citizens,” Mr. Paulson said.
The second reason was that it was not effectively regulated. “Although many of AIG’s subsidiaries—including its insurance companies—were subject to varying levels of regulation, the parent entity was, for all practical purposes, an unregulated holding company.”
Consequently, there was no one regulator with a complete picture of AIG or a comprehensive understanding of how it was run. “It was not until AIG started to fail that regulators began to understand how badly managed it had been and how much the toxic aspects of parts of its business had infected otherwise healthy parts,” Mr. Paulson said.
Third, AIG could not be effectively “wound down,” he said. “Unlike failed depository institutions which can be taken over by the FDIC with little or no harm to depositors, or the GSEs [government sponsored enterprises] which were seamlessly placed into conservatorship by Treasury and the Federal Housing Finance Agency, there was—and is—no resolution authority available to wind down a failing institution like AIG.
“The only option is bankruptcy, a process that is simply not capable of protecting the millions of Americans whose finances are intertwined with AIG’s,” he said.
Mr. Paulson commented, “I do not mean to say that I am happy that we needed to intervene,” noting that taxpayer money should not have to be spent to save a “mismanaged and misguided enterprise.”
But, he added, “the fundamental problem lies not in how we intervened, but in why we needed to intervene.”
He said the U.S. needs to modernize its regulatory structure by creating a systemic risk regulator and resolution authority so any large firm that fails can be liquidated without de-stabilizing the system.
“Large financial enterprises in this country will always play a role that is essential to our economic growth, but they must only be permitted to grow and interconnect throughout our economy under careful oversight and with a mechanism for allowing those connections to be broken safely,” he added.
Meanwhile, Federal Reserve Board Chairman Ben Bernanke said stabilizing AIG, not the financial health of the trading partners, was the reason the Fed decided to pay off the AIG credit default swaps at par.
His statement came in a written response to Rep. Issal, who oversaw the minority report suggesting AIG bank counterparties were paid too much and the FRBNY and Federal Reserve attempted a cover up of bailout details.
Mr. Bernanke said, “The overriding motivating factor in structuring the payments to the counterparties was to relieve AIG of the destabilizing drains on its liquidity caused by the requirement to continue to post collateral as required by the CDS [credit default swaps] contracts.
“All counterparties were treated the same for payment purposes. Whether the individual counterparties were in relatively sound financial condition or not was not a factor in the decision regarding the amount paid to the counterparties or whether concessions should be sought from them.”
Mr. Geithner In response to a question, said the Fed had no legal or other authority to take any other action than it did in paying off the CDS. He said there was no way to put AIG in bankruptcy.
“To stand back and let it burn,” he said would be irresponsible and the Fed acted to protect the innocent through the bailouts and made an effort to reduce the cost to the American taxpayer to the lowest amount possible,.
He noted that the protections in place against bank bankruptcy do not exist for insurance companies.
Wednesday, January 27, 2010
Lloyd's Ordered to Pay Alleged Swindler Stanford's Defense Costs
A U.S. federal judge ordered insurer Lloyd's of London Tuesday to pay for alleged swindler Allen Stanford's defense.
Stanford and three other defendants sued the insurer after Lloyd's stopped providing coverage last year under a directors and officers policy, citing a money laundering exclusion.
"Without access to the funds for which plaintiffs duly contracted, through the Stanford entities, and upon which they relied, the court finds plaintiffs will be unable to mount the defense required in such complex cases as the criminal action and the SEC action,'' U.S. District Judge David Hittner said in a 42-page order.
Lloyd's must pay all costs and expenses that have been submitted within 10 days, the order said.
Stanford, his former chief investment officer Laura Holt and former accounting executives Gilbert Lopez and Mark Kuhrt and an Antiguan regulator face criminal and civil charges for for defrauding investors in a $7 billion Ponzi scheme involving certificates of deposit.
Stanford, 59, is in jail awaiting a January 2011 trial. Stanford, Holt, Kuhrt and Lopez have denied any wrongdoing.
The Lloyd's case is Laura Pendergest-Holt, R. Allen Stanford, Gilbert Lopez and Mark Kuhrt v Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Co, U.S. District of Court, Southern District of Texas, No. 09-03712.
Stanford and three other defendants sued the insurer after Lloyd's stopped providing coverage last year under a directors and officers policy, citing a money laundering exclusion.
"Without access to the funds for which plaintiffs duly contracted, through the Stanford entities, and upon which they relied, the court finds plaintiffs will be unable to mount the defense required in such complex cases as the criminal action and the SEC action,'' U.S. District Judge David Hittner said in a 42-page order.
Lloyd's must pay all costs and expenses that have been submitted within 10 days, the order said.
Stanford, his former chief investment officer Laura Holt and former accounting executives Gilbert Lopez and Mark Kuhrt and an Antiguan regulator face criminal and civil charges for for defrauding investors in a $7 billion Ponzi scheme involving certificates of deposit.
Stanford, 59, is in jail awaiting a January 2011 trial. Stanford, Holt, Kuhrt and Lopez have denied any wrongdoing.
The Lloyd's case is Laura Pendergest-Holt, R. Allen Stanford, Gilbert Lopez and Mark Kuhrt v Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Co, U.S. District of Court, Southern District of Texas, No. 09-03712.
Sunday, December 21, 2008
Robert Paterson's Boyd 2008 Summary - Hope!
From Robert Paterson's blog on Boyd 2008:
* The goal for us all to work to is clear - that we have to build back into the system Resiliency. This means that each region has to work to become largely energy, food and financially self sustaining and that each region needs to network into the others. In effect we shift from an efficient machine to a resilient network
* That the leadership model is no longer the dominant hero but the ego-less servant
* That we cannot wait to be saved. We have to all do our part to make our place "Home"
Many are desperate that somehow President Obama save us and importantly turn the clock back. Take us back to consumer heaven of 2006. Even if he could, would this be the right thing to do? To take us back to a world that is a fantasy?
What got us to this place?
The Dark Side of a Mindset. The Machine/Institutional/Newtonian/Engineering Mindset that created most of the wealth of the 19th and 20th century tipped over into the dark side. Where not only did we give up all our power to institutions but gave the few that ran them the license to use these institutions for their own benefit.
So we spend nearly a trillion on defense but not on what the troops really need. We spend billions of health and America is on a par with Cuba. We spend billions on education and more than 50% of Americans are functionally illiterate. We spend billions on food and we eat crap. We see that the leadership of these institutions live in a bubble. The gap between the rich and poor has never been greater. The middle class is being squeezed. We don't make anything anymore. We make no progress toward energy independence.
Friday, December 12, 2008
Deflation has become inevitable
For a while now I have been on the fence on the inflation/deflation issue – whether the massive monetisation of bad debts by central banks and governments will lead to rapidly escalating inflation as currencies are debased or, alternatively, lead to deflation as bad debts and illiquidity undermine all commercial and financial activity in the economy. I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels.
In Lombard Street, Bagehot’s seminal tome on fractional reserve central banking, Bagehot advises any central bank facing a simultaneous credit crisis and currency crisis to raise interest rates. By raising rates they will ensure that foreign creditors remain incentivised to maintain the general level of credit available while the central bank resolves the local liquidity crisis through liquidation of failed banks and temporary liquidity support of stressed banks.
The very opposite policies have been pursued by central banks in the US, Europe and UK since the beginning of the sub-prime crisis in August 2007. They have cut policy rates drastically, and as the crisis escalated and spread, the yield on government debt has dropped to negative territory. Meanwhile they have shielded those responsible for the creation of record levels of bad debt from any regulatory accountability, relaxed transparency of accounts, and provided massive taxpayer-funded financial infusions to prevent failure and liquidation.
While in the short term these policies have expediency and the maintenance of market “confidence” on their side, in the longer term these policies must undermine any confidence a rational and objective saver or investor might have that savings or investment in the US, EU or UK will be fairly remunerated at an above-inflation rate, or that savings and investments will be protected by effective oversight and regulation from the sorts of executive debasement and outright misappropriation and fraud that are beginning to colour our perceptions of the past decade.
Anyone sitting on a pile of cash now is unlikely to want to either (a) place it in a bank, or (b) invest it in the stock market. As a result, the implosion of the financial and real economy must continue no matter how big the central bank’s aspirations for its balance sheet or the treasury’s aspirations for its deficit.
If US, EU and UK had substantial domestic savings to fund their banks (as in Japan in 1990), then perhaps the consequences would not be so imminently disastrous. Lacking sufficient domestic savings, however, their actions will likely make foreign creditors in Japan, China, the Gulf and elsewhere question whether it is worthwhile to keep pumping scarce savings into such flawed and reckless economies.
During the reckless boom years, savings collapsed in bubble economies as retail and commercial and financial actors alike chased speculative yields with greater and greater leverage. During the reckless bust years, savings will collapse further as retail and commercial and financial actors chase safety by hoarding their meagre remaining assets from further erosion by refusing to lend at negative returns and refusing to finance failed corporate and investment models that only enrich poltically-connected management and intermediaries.
The determination to avoid any accountability for failed banks, failed business models, failed regulatory systems and failed academic rationales for all the above invites anyone with spare cash – an increasingly select crowd – to withhold it from further depredations. It is this instinct, more than confidence in the government, which is driving so many to seek the temporary safety of short-dated government securities.
The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly hard to finance and ultimately contract. Irresponsible central banks and governments can try to bail out the failed banks, businesses and municipalities at the centre of every popped bubble, but the bubble economies are ever more certain to deflate with each bailout. Each bailout further undermines the market discipline which is bedrock to a saver or investor’s decision to part with hard-earned cash by trusting it to the intermediation of the management of a bank or business.
It’s this simple: I won’t invest in a country that bails out failure and punishes savers. I won’t invest in the US or UK until they change course and protect savers and investors, ensuring a reasonably predictable positive return. In the EU, I will be very selective, preferring those conservative states like Germany that never embraced the worst excesses, although sadly still have fall out from individual banks' stupidity in buying into foreign excess. I will know when it is safe to reinvest when policy interest rates, bank/intermediary oversight and accounting standards give me confidence I am better protected than the corporate or financial elite.
While it may take the Asian and the Gulf State investors longer to embrace my analysis, I have no doubt that they too will eventually conclude that parting with their savings under the terms now on offer will only deepen their losses. They would be better off keeping the money at home, investing locally under local laws and vigilance, and letting the US and UK implode.
The argument against this has always been that with trillions already invested in the US during the deficit years, the Chinese and Gulf States would suffer even more horrible losses from a collapse of the western economies. This is accurate, but not complete, as it ignores the relative value of cash investment at the top and bottom of a bursting bubble. Once the collapse has bottomed out, so long as a globalised economy survives, there will be even better opportunities for those with savings to invest selectively in businesses with clearer prospects and more certain profitability under regulatory frameworks which have been restored to a proper balance of investor protection and intermediary oversight.
Right now survival of businesses in the West depends largely on political pull and access to regulatory forbearance and central bank or treasury finance. The market has failed, and officialdom is collaborating in perpetuating that failure.
Should the western economies implode in deflation, however, there will be new opportunities to return to market-based policies that reward effective, efficient management and punish corrupt, debased management. Until that happens, those that invest will continue to lose money. Once deflation is exhausted, then those that invest can expect to make and retain profits again.
I think it took me so long to feel confident about predicting deflation because the floating currency system under dollar hegemony and Bretton Woods II distorts the workings of both inflation and deflation. Despite the US being the epicentre of all the failed debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance, the US dollar has recently strengthened as deflation globalised. The US exported inflation in the boom years, and now exports deflation in the bust years.
Since spring 2008, as US investment banks sold off assets, imposed margin calls, and used access to unsegregated wholesale assets in custody in the rest of the world to upstream liquidity to their US-based parents and affiliates, the dollar has strengthened relative to other currencies. The media reports this as a “flight to quality”, but it is more like a last looting of the surrounding countryside before dangerous brigands hole up in their hilltop fortress. The brigands appear temporarily wealthy compared to the peons left stripped and penniless and facing winter. When the brigands have eaten all the stolen grain and livestock, however, they will have no means to replenish except to use force to raid the countryside again. The peons can always hunt, forage, farm and carefully husband a surplus to gradually increase their wealth. If the brigands raid too thoroughly or too regularly, the peons have no incentive to grow crops or keep herds (negative savings returns) and everyone starves (deflation).
In the meanwhile, the peons just might wise up, hide any surplus more securely and organise mutual defense against further attacks to ensure that their peon children prosper and the brigands die off. That would be the end of Bretton Woods II, and the rise of China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity and regional growth.
I reread my piece on Fisher’s Theory of Debt Deflation in Great Depressions the other day. One of the more confusing aspects is his assertion that the dollar “swells” as debt deflation takes hold. What he meant, of course, is that deflation increases the quantity of assets and the likely investment return each dollar purchases as deflation wrings debt and misallocation of capital out of the economy.
It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world. Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again. In the meanwhile, any wealth saved securely from state seizure will "swell" to buy more assets in future - a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted savers and investors.
I have quoted Mr John Mill before, but it bears repeating: ““Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.” The extent to which capital has been betrayed in the past quarter century under Bretton Woods II, bank deregulation and the Basle Capital Adequacy Accords is unrivalled in the history of fiat banking. The bankers, lawmakers, regulators and academics who collaborated in the betrayal still hold power, like the well-armed brigands in the fortress, and their continued collaboration to prevent accountability must inevitably discourage honest savers from risking further loss. Even so, it is the savers/peons who hold the ultimate power as they can starve the brigands.
Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.
When that happens, if reason is restored in markets with effective oversight, I might consider investing again, very selectively, in whatever productive works might then be on offer and only when secure in realising - and retaining - a positive yield.
_________________
Apologies for not posting last Friday.
Writing for this blog has been a great experience, forcing me to refine my views about current events and the principles which should underpin financial market interactions and supervision. In parallel, I have been forced to re-evaluate whether I should commit to sorting out some of the practical aspects of the future of banking in the global economy. Writing takes a lot of time and passion, and these are limited commodities for any of us.
I have accepted a full time executive position which will take all of my time and passion going forward in 2009, so the blogging has to be suspended at year end. The job will enable me to put into practice the principles I’ve illuminated here, hopefully mitigating some of the impacts of financial instability. I’ll still lurk, and maybe comment on Professor Roubini’s thread from time to time.
Wish me luck!
In Lombard Street, Bagehot’s seminal tome on fractional reserve central banking, Bagehot advises any central bank facing a simultaneous credit crisis and currency crisis to raise interest rates. By raising rates they will ensure that foreign creditors remain incentivised to maintain the general level of credit available while the central bank resolves the local liquidity crisis through liquidation of failed banks and temporary liquidity support of stressed banks.
The very opposite policies have been pursued by central banks in the US, Europe and UK since the beginning of the sub-prime crisis in August 2007. They have cut policy rates drastically, and as the crisis escalated and spread, the yield on government debt has dropped to negative territory. Meanwhile they have shielded those responsible for the creation of record levels of bad debt from any regulatory accountability, relaxed transparency of accounts, and provided massive taxpayer-funded financial infusions to prevent failure and liquidation.
While in the short term these policies have expediency and the maintenance of market “confidence” on their side, in the longer term these policies must undermine any confidence a rational and objective saver or investor might have that savings or investment in the US, EU or UK will be fairly remunerated at an above-inflation rate, or that savings and investments will be protected by effective oversight and regulation from the sorts of executive debasement and outright misappropriation and fraud that are beginning to colour our perceptions of the past decade.
Anyone sitting on a pile of cash now is unlikely to want to either (a) place it in a bank, or (b) invest it in the stock market. As a result, the implosion of the financial and real economy must continue no matter how big the central bank’s aspirations for its balance sheet or the treasury’s aspirations for its deficit.
If US, EU and UK had substantial domestic savings to fund their banks (as in Japan in 1990), then perhaps the consequences would not be so imminently disastrous. Lacking sufficient domestic savings, however, their actions will likely make foreign creditors in Japan, China, the Gulf and elsewhere question whether it is worthwhile to keep pumping scarce savings into such flawed and reckless economies.
During the reckless boom years, savings collapsed in bubble economies as retail and commercial and financial actors alike chased speculative yields with greater and greater leverage. During the reckless bust years, savings will collapse further as retail and commercial and financial actors chase safety by hoarding their meagre remaining assets from further erosion by refusing to lend at negative returns and refusing to finance failed corporate and investment models that only enrich poltically-connected management and intermediaries.
The determination to avoid any accountability for failed banks, failed business models, failed regulatory systems and failed academic rationales for all the above invites anyone with spare cash – an increasingly select crowd – to withhold it from further depredations. It is this instinct, more than confidence in the government, which is driving so many to seek the temporary safety of short-dated government securities.
The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly hard to finance and ultimately contract. Irresponsible central banks and governments can try to bail out the failed banks, businesses and municipalities at the centre of every popped bubble, but the bubble economies are ever more certain to deflate with each bailout. Each bailout further undermines the market discipline which is bedrock to a saver or investor’s decision to part with hard-earned cash by trusting it to the intermediation of the management of a bank or business.
It’s this simple: I won’t invest in a country that bails out failure and punishes savers. I won’t invest in the US or UK until they change course and protect savers and investors, ensuring a reasonably predictable positive return. In the EU, I will be very selective, preferring those conservative states like Germany that never embraced the worst excesses, although sadly still have fall out from individual banks' stupidity in buying into foreign excess. I will know when it is safe to reinvest when policy interest rates, bank/intermediary oversight and accounting standards give me confidence I am better protected than the corporate or financial elite.
While it may take the Asian and the Gulf State investors longer to embrace my analysis, I have no doubt that they too will eventually conclude that parting with their savings under the terms now on offer will only deepen their losses. They would be better off keeping the money at home, investing locally under local laws and vigilance, and letting the US and UK implode.
The argument against this has always been that with trillions already invested in the US during the deficit years, the Chinese and Gulf States would suffer even more horrible losses from a collapse of the western economies. This is accurate, but not complete, as it ignores the relative value of cash investment at the top and bottom of a bursting bubble. Once the collapse has bottomed out, so long as a globalised economy survives, there will be even better opportunities for those with savings to invest selectively in businesses with clearer prospects and more certain profitability under regulatory frameworks which have been restored to a proper balance of investor protection and intermediary oversight.
Right now survival of businesses in the West depends largely on political pull and access to regulatory forbearance and central bank or treasury finance. The market has failed, and officialdom is collaborating in perpetuating that failure.
Should the western economies implode in deflation, however, there will be new opportunities to return to market-based policies that reward effective, efficient management and punish corrupt, debased management. Until that happens, those that invest will continue to lose money. Once deflation is exhausted, then those that invest can expect to make and retain profits again.
I think it took me so long to feel confident about predicting deflation because the floating currency system under dollar hegemony and Bretton Woods II distorts the workings of both inflation and deflation. Despite the US being the epicentre of all the failed debts, failed securitisations, failed credit derivatives, failed rating agencies, failed banking businesses, failed corporate governance, failed accounting standards, failed capital adequacy models, and failed regulatory forbearance, the US dollar has recently strengthened as deflation globalised. The US exported inflation in the boom years, and now exports deflation in the bust years.
Since spring 2008, as US investment banks sold off assets, imposed margin calls, and used access to unsegregated wholesale assets in custody in the rest of the world to upstream liquidity to their US-based parents and affiliates, the dollar has strengthened relative to other currencies. The media reports this as a “flight to quality”, but it is more like a last looting of the surrounding countryside before dangerous brigands hole up in their hilltop fortress. The brigands appear temporarily wealthy compared to the peons left stripped and penniless and facing winter. When the brigands have eaten all the stolen grain and livestock, however, they will have no means to replenish except to use force to raid the countryside again. The peons can always hunt, forage, farm and carefully husband a surplus to gradually increase their wealth. If the brigands raid too thoroughly or too regularly, the peons have no incentive to grow crops or keep herds (negative savings returns) and everyone starves (deflation).
In the meanwhile, the peons just might wise up, hide any surplus more securely and organise mutual defense against further attacks to ensure that their peon children prosper and the brigands die off. That would be the end of Bretton Woods II, and the rise of China, India, the Gulf and other productive and/or resource rich states which invest surplus in domestic productivity and regional growth.
I reread my piece on Fisher’s Theory of Debt Deflation in Great Depressions the other day. One of the more confusing aspects is his assertion that the dollar “swells” as debt deflation takes hold. What he meant, of course, is that deflation increases the quantity of assets and the likely investment return each dollar purchases as deflation wrings debt and misallocation of capital out of the economy.
It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world. Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again. In the meanwhile, any wealth saved securely from state seizure will "swell" to buy more assets in future - a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted savers and investors.
I have quoted Mr John Mill before, but it bears repeating: ““Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.” The extent to which capital has been betrayed in the past quarter century under Bretton Woods II, bank deregulation and the Basle Capital Adequacy Accords is unrivalled in the history of fiat banking. The bankers, lawmakers, regulators and academics who collaborated in the betrayal still hold power, like the well-armed brigands in the fortress, and their continued collaboration to prevent accountability must inevitably discourage honest savers from risking further loss. Even so, it is the savers/peons who hold the ultimate power as they can starve the brigands.
Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.
When that happens, if reason is restored in markets with effective oversight, I might consider investing again, very selectively, in whatever productive works might then be on offer and only when secure in realising - and retaining - a positive yield.
_________________
Apologies for not posting last Friday.
Writing for this blog has been a great experience, forcing me to refine my views about current events and the principles which should underpin financial market interactions and supervision. In parallel, I have been forced to re-evaluate whether I should commit to sorting out some of the practical aspects of the future of banking in the global economy. Writing takes a lot of time and passion, and these are limited commodities for any of us.
I have accepted a full time executive position which will take all of my time and passion going forward in 2009, so the blogging has to be suspended at year end. The job will enable me to put into practice the principles I’ve illuminated here, hopefully mitigating some of the impacts of financial instability. I’ll still lurk, and maybe comment on Professor Roubini’s thread from time to time.
Wish me luck!
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