Posts filed under “Regulation”

Why Are We Bailing Out Insurers?

Will someone please explain to me why we are giving $22 Billion to Insurers?

“The Treasury Department will make federal bailout funds available to a number of U.S. life insurers, acting on the embattled sector’s long-running effort to get government help. The Treasury is prepared to inject up to $22 billion into the insurers under the rescue plan launched last fall as the Troubled Asset Relief Program, said a person familiar with the matter.

The capital infusions mark the first new round of federal rescue funding since the biggest banks got more help around the turn of the year. Aid for the struggling life-insurance industry was expected, but the companies had been waiting for weeks since The Wall Street Journal reported in early April that the Treasury had decided to give federal money to qualified companies in the industry. As far back as November, some companies were taking steps such as agreeing to buy savings and loans in order to become eligible . . .

Many life-insurance companies, like others in the financial sector, got caught carrying too much risk when the financial crisis hit. Some were hurt by their variable-annuity businesses, under which they sold products often linked to equity markets that promised minimum payouts even if markets fell. Insurers also lost money on investments in bonds, real estate and other assets that back their policies.”

Why?

Why do insurers, who have fiduciary obligations to manage their assets prudently, require taxpayer largesse?

Yet even more moral hazard is being heaped upon us.

This is totally unacceptable. If you did not manage your assets prudently, if you failed to employ appropriate risk management procedures, and if you come to the government teat for aid, there must be a heavy cost and major strings attached:

  1. Bailout Monies need to be eventually repaid;
  2. Entrenched management needs to be fired;
  3. Excess bonuses must be clawed back;
  4. Shareholders (both public and mutual) need to suffer for their bad investment;
  5. Competitive firms that ran their business properly should not be disadvantaged.

Why would we give money  managers with a demonstrated inability to manage it properly? Why would we reward shareholders who made losing bets? Why are we punishing well managed, prudent funds? THIS IS OUTRAGEOUS.

These are independent companies who should be able to raise capital on their own. At the very worst, the most I believe that should be authorized for these firms are loan assistance/guarantees. Even that is problematic.

Here is where $22 billion in Corporate Welfare is going:

Hartford Financial Services

Prudential Financial Inc.,

Principal Financial Group Inc.

Lincoln National Corp.

Allstate

Ameriprise Financial

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Source:
U.S. Slates $22 Billion for Insurers From TARP
ANDREW DOWELL and JAMIE HELLER
WSJ, May 15, 2009

http://online.wsj.com/article/SB124234565889921705.html

Category: Bailouts, Corporate Management, Markets, Really, really bad calls, Regulation, Taxes and Policy

Lessons of the Financial Crisis for Banking Supervision

Chairman Ben S. Bernanke

At the Federal Reserve Bank of Chicago Conference on Bank Structure and Competition, Chicago, Illinois (via satellite)

May 7, 2009

Lessons of the Financial Crisis for Banking Supervision

After more than a year and a half of financial crisis, both bankers and policymakers must contend with two questions: What have we learned from this extraordinary episode? And how can we apply those lessons to strengthen our banking system and to avoid or mitigate future crises? Getting the answers to these questions right is critical for our future financial and economic health.1

The Federal Reserve has been intensively evaluating the lessons of the crisis, both with respect to the companies we supervise and to our own policies and procedures, and we are actively incorporating what we have learned into daily supervisory practice. Increasing the effectiveness of supervision must be a top priority for our institution. In my remarks today I will outline some steps that the Federal Reserve has already taken in the wake of the crisis to strengthen capital, liquidity, and risk management in the banking sector, as well as to improve the supervisory process itself. I will also touch on what we have learned about the importance of effective consolidated supervision and the potential benefits of a more macroprudential orientation to financial oversight.

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Category: Credit, Federal Reserve, Regulation, Think Tank

Wachovia Compliance Stuck in 20th Century ?

Those of you at Wachovia may have had hard time lately accessing the blog. (You are probably reading this via RSS). Numerous readers from the firm have written in to say they could access The Big Picture but not post comments. Several readers said they can no longer access the site. Apparently, [some offices at]…Read More

Category: Legal, Regulation, Weblogs

Ratings Agencies Abject Failure

“Ratings agencies just abjectly failed in serving the interests of investors.” -SEC Commissioner Kathleen Casey > Nice takedown on the highly conflicted, over rated ratings agencies in Bloomberg yesterday: “Investors, traders and regulators have been questioning whether credit rating companies serve a good purpose ever since Enron Corp. imploded in 2001. Until four days before…Read More

Category: Bailout Nation, Legal, Markets, Regulation

Speeches & Testimony Remarks by FDIC Chairman Sheila Bair to The Economic Club of New York; New York, New York April 27, 2009 Good afternoon everybody. I’m honored to be here this afternoon. I’m told it’s the first time in your distinguished, 102-year history that you’ve invited an FDIC chairman to speak. You’ve had presidents,…Read More

Category: Regulation, Think Tank

The Prisoners Dilemma: John Thain vs Ken Lewis

“Regulators are supposed to tell you to obey the law, not to disobey the law. If you’re the CEO, your first obligation is not to your regulator, it’s to your institution and shareholders.”

-Jonathan R. Macey, deputy dean of Yale Law School

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I have not commented on the allegations by Bank of America CEO Ken Lewis that he was forced into making a disastrous acquisition of Merrill Lynch.

Why? Because they appeared to me be utter and shameless nonsense, an attempt to worm out of responsibility.  Indeed, the very statements by Bank of America CEO Ken Lewis appeared to be excuse-making for a lousy acquisition (which Bof A has quite the history of). Its the sort of weasely responsibility evading CEO speak we have come to expect these days. To be blunt, I was astonished anyone took them very seriously.

Yet they were taken seriously, by quite a few people — including a huge front page Wall Street Journal article. The mere accusation means that we are likely to see former Treasury Secretary Hank Paulson — a major cause of the credit crisis and a horrific bailout steward — up for a major grilling in Congress.

This morning, in the same WSJ venue, we learn that many of the statements Ken Lewis made under oath were directly contradicted by former Merrill CEO John Thain (but not under oath). Thain claims these understandings were in in writing.

One of these  two CEOs is lying, and if its the guy who was doing so in sworn testimony, he may have a very big problem on his hands.

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Category: Bailouts, Legal, M&A, Regulation, Taxes and Policy

Regulatory Malfeasance and the Financial System Collapse

Regulatory Malfeasance and the Financial System Collapse by Joseph R. Mason April 14, 2009 Kotok comment: we are pleased to forward this guest commentary by Professor Joe Mason. In it he outlines ways in which the securitization process went awry and led to the financial crisis we have been experiencing. Joe notes some of the…Read More

Category: Bailouts, BP Cafe, Regulation

SEC Examining Oversight of Credit Rating Agencies

Looks like an interesting panel — anyone near D.C. on April 15 should consider going . . .

10:10 a.m. — Panel One: Current NRSRO Perspectives: What Went Wrong and What Corrective Steps Is the Industry Taking?

  • Daniel Curry, DBRS
  • Sean Egan, Egan-Jones Ratings
  • Stephen Joynt, Fitch Ratings
  • Raymond McDaniel, Moody’s Investor Service
  • Deven Sharma, Standard & Poor’s

11:30 a.m. — Panel Two: Competition Issues: What are Current Barriers to Entering the Credit Rating Agency Industry?

  • Ethan Berman, RiskMetrics Group
  • James H. Gellert, RapidRatings
  • George Miller, American Securitization Forum
  • Frank Partnoy, University of San Diego
  • Alex Pollock, American Enterprise Institute
  • Damon Silvers, AFL-CIO
  • Lawrence J. White, New York University

12:30 p.m. — Lunch Break

1:15 p.m. — Panel Three: Users’ Perspectives

  • Deborah A. Cunningham, Securities Industry and Financial Markets Association
  • Alan J. Fohrer, Southern California Edison
  • Christopher Gootkind, Wellington Management
  • James Kaitz, Association of Financial Professionals
  • Kurt N. Schacht, CFA Institute
  • Bruce Stern, Association of Financial Guaranty Insurers
  • Paul Schott Stevens, Investment Company Institute

2:45 p.m. — Panel Four: Approaches to Improve Credit Rating Agency Oversight

  • Richard Baker, Managed Funds Association
  • Jörgen Holmquist, European Commission
  • Mayree C. Clark, Aetos Capital
  • Joseph A. Grundfest, Stanford Law School
  • Glenn Reynolds, CreditSights
  • Stephen Thieke, Group of Thirty

The roundtable is expected to end at approximately 4:15 p.m. with concluding remarks by Erik R. Sirri, Director of the SEC’s Division of Trading & Markets.

In the fall of 2006, Congress passed the Credit Rating Agency Reform Act, providing the SEC for the first time with authority to supervise credit rating agencies. Using this authority that became effective in June 2007, the Commission has adopted two major rulemakings, has conducted an extensive 10-month examination of three major credit rating agencies, and has several pending proposals to further the Act’s purpose of promoting accountability, transparency, and competition in the rating industry.

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Category: Bailouts, Credit, Legal, Regulation

The Cult of Finance

I mentioned the “cult of equities” earlier this morning; An article in the Atlantic on the Cult of Finance is making the rounds:  The Quiet Coup. I found it very similar to Bailout Nation. If this sort of stuff floats your boat, then you will love the book — it gets much more granular than…Read More

Category: Credit, Derivatives, Legal, Markets, Politics, Regulation

Paul Krugman is Wrong About Securitization

Since the credit crisis began, I have frequently found myself in agreement with Paul Krugman. Not everything, but for the most part, especially on many major points, we are sympatico: He has been correct about Moral Hazard, about the folly of these many bailouts, about the advantages of nationalizing the banks. And, I suspect he…Read More

Category: Bailouts, Credit, Derivatives, Federal Reserve, Legal, Regulation