Category: Insurance

Economics Update

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I think that the first story is a real biggie, the Insurance Bureau at the Financial Supervisory Commission of Taiwan has forbidden Insurance companies in that nation* from buying mortgage backed securities from the GSEs, Fannie Mae, Freddie Mac and Ginnie Mae.

The scare quote of the article is, The FSC has not only limited insurance company exposure to Fannie, Freddie and Ginnie bonds and mortgage-backed securities, but has decided that existing credit ratings are meaningless.“

Taiwan is not huge in relation to world GDP, but it’s a lot bigger than Iceland….We may be seeing the first furtive steps toward an exit that will likely end in a stampede.

If I’m wrong about a stampede away from US securities, it’s clear that there
is a stampede away from hedge funds…Makes sense, why pay these guys something like 20% when they are losing money.

In the real world or ordinary people and work, the weekly US jobless claims were worse than forecast, 478,000. The standard caveat about this being a noisy metric applies.

I would be remiss in not noting that the 4 week moving average fell, to 480,250 from 484,750.

BTW, it looks like the credit crunch is not near over, because very little let up on interest rate spreads. (H/T Calculated Risk.)

For what it’s worth, Oil prices were up a bit, because there are indications that OPEC might actually make a small supply reduction stick amongst its members.

The thing that really scares me is the fact that Washington Mutual’s Credit Default Swaps will be sold at 57¢ on the dollar, and this is considered a relief to investors.

Even scarier is the little note at the bottom that losses in the Lehman debacle, when investors got 8¢ on the dollar ended up losing less money than expected, because it was a small group who all sold in a big circle to each other.

What happens when one of the members of this circle jerk goes down in flames?

*Or whatever the frack the Taiwan’s status is right now.

Not Enough Bullets, Regulation Edition

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Even after the government bailout, AIG is still lobbying to relax regulations on its business:

When the U.S. took control of failing mortgage titans Fannie Mae and Freddie Mac, it prohibited them from lobbying. But it hasn’t banned the practice at AIG, a huge insurer that is still 20%-owned by public shareholders.

AIG is currently working to ease some provisions in a new federal law establishing strict oversight of mortgage originators, according to state regulators. The law requires that originators be licensed by the states, and that they supply comprehensive information so state regulators can track their activities.

To quote Bruce Cockburn, “If I had a rocket launcher, some son-of-bitch would die.”

Economics Update

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First the Institute for Supply Management’s manufacturing index just fell off a cliff, dropping to 43.5%, when the consensus was for 49.6%.

This is the lowest number since October, 2001, when manufacturers were freaking out over 911, and the biggest drop since 1984.

The fact that factory orders are down 4%, and that the
Baltic Dry Index Tanks, a survey of shipping costs are also in the tank, reinforce the idea that something is amiss, though I woul,d be remiss not to note that the Baltic Dry Index has a lot of noise in the data, and so is not particularly reliable.

Meanwhile, the marginally less noisy weekly jobless claims number have shown an increase too, up 1000, to 497K.

We also have evidence that the credit freeze up continues, with LIBOR spreads rising, and commercial paper basically going away.

In fact, the spread between two year debt swaps and treasuries hit a record, 167.25 basis points.

It doesn’t help that hedge funds are experiencing problems related to the Lehman collapse, with billions of dollars still tied up with mess, while facing a surge of withdrawals from their clients.

Furthermore, there are rumors of a major insurance company on the verge of collapse, and so borrowing costs for the major insurance companies have spiked.

Things aren’t looking great with college’s finances either, with Commonfund restricting withdrawals from its Intermediate Term Fund, which serves schools and other non-profits, because of liquidity concerns.

On the other side of the ocean, the ECB is openly talking about a rate cut, which has pushed the Euro below $1.40:€1.00.

This is all pushing commodities down in price, with Oil, Gold, and Corn falling on the expectation of a stronger dollar and a weaker global economy.

In banking and real estate, 30-year fixed-rate mortgage rates are up marginally, and Citi bought Wachovia for some magic beans (actually around $1/share), and the FDIC got preferred shares.

While not technically a bank failure, that is what it is in reality.

Credit Default Swaps, Barn Doors, and Cows

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Well it appears that the state of New York is moving toward regulating some credit default swaps as insurance.

This is actually important, since it has been known for 300 years that insurance is not just any sort of financial instrument.

Basically, when insurance policies are traded as securities, you get fraud. This was learned in bubbles in the British markets in the 1700s, and so insurance is allowed only for those who have the actual loss.

About a decade ago, New York State said that CDS were not insurance, and so they were not subject to insurance regulation, leading to the current orgy of fraud, speculation, and abuse.

That being said, this is too late, and we know this because SEC Chari Christopher Cox is calling for regulation too, and Cox is a Randroid free-marketeer, and as such, never calls for regulation until it is too late.

Economics Update

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If you think that this crisis is over, it’s not even close, as evidenced by the fact that 40% of US money market funds posted no returns yesterday:

More than 40 percent of U.S. taxable money market mutual funds posted zero return Thursday amid persistent turmoil in the credit markets, fund tracker Lipper said Friday.

Lipper said 560 of the 1,263 classes of taxable money funds it tracks earned no return Thursday. This compared with 73 classes that posted zero return Wednesday and 63 Tuesday.

A lot of taxable money mutual funds “put up big fat zeros yesterday,” said Jeff Tjornehoj, senior research analyst at Lipper in Denver. “This is unprecedented in recent history.”

Expect to see the phrase, “unprecedented in recent history,” a lot in the next few months.

Part of this was no doubt the rather large gyrations in US T-Bills over the past few days, which went almost to 0% a on Thursday, because people were so concerned about finding safe havens. The 3 month T-Bill was at 0.22% Thursday, before heading back up to 0.91% on Friday following announcement of various rescue plans for the financial markets.

The dollar rose in response to the bailouts too, as did oil, though gasoline is down for the 3rd straight day, as that market adjusts to the realities of Hurricane Ike.

That being said, even with the rescue packages, Moody’s is still looking at cutting its ratings on monoliner insurers Ambac and MBIA.

Also, it now looks like Morgan Stanley is still looking at merging with a commercial bank, even if the news of the bailout plans may have helped.

AIG Nationalized

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The FRB: Press Release:

The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.

The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.

Fragility, huh? If this economy had any more of a glass jaw, it could shave with Windex®.

BTW, the following is a lie:

The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.

The Fed is treating this as a liquidity problem but in fact, it’s an insolvency problem. There is not enough assets to pay back the Fed.

Economics Update

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You know that there is a problem, when I open with ratings downgrades.

We have S&P downgrading Washington Mutual to junk status, and even more significantly, AIG, the largest insurance company in the world has been downgraded by Fitch Ratings to A from AA-, and S&P and Moody’s downgraded them too, from to A- from AA- for S&P, and to to A2 from Aa3 for Moody’s.

This is ugly, and it is not surprising that the costs of corporate bond insurance has skyrocketed on what is called “counterparty risk” by the MBA types, and the belief that you are dealing with a bunch of lying bastards foo the rest of us.

It’s the same reason that the costs of overnight borrowing has gone up too, with the LIBOR more than doubling from 3.10625% to 6.43750%.

No one knows when the next shoe is going to drop, and even the additional $70 billion that the Fed dropped out of helicopters wasn’t much help.

It’s why we’re seeing Thornburg Mortgage struggle under a sudden onslaught of margin calls.

When Goldman Sachs earnings 70%, even though they hedged against the real estate crash, you know that no one is making money.

And at the end of all this the Fed decided to leave interest rates unchanged, which is not surprising, since they are already pushing on a string.

Meanwhile, the dollar is behaving like my cat when he gets outside in a rain squall, it really did not move, but you can see the conflict between fear driving people to dollars, and the fear of the US financial meltdown driving people away from the dollar.

We actually saw consumer prices fall, driven by falling energy prices (oil is now about $91.15/bbl on demand concerns from the financial meltdown)

Gasoline still went up, driven by the came hurricane refinery concerns that have driven prices over the past 4 or so days.

Economics Update

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Well, I guess that the lead story has to be Lehman Brothers, which appears to be collapsing Bear Stearns style, and looking for government funding of it’s eventual sale, Bear Stearns style, so negotions with potential buyers continue apace.

The Fed and the Treasury Department appear to be seriously twisting arms to make the deal go through, though they claim that there will be “no federal money” involved.

Seriously, all we are doing here is socializing losses. Nationalize the lot of them, throw out upper management, and go after their bonuses, otherwise, we will see more of the same.

Of course the fact that WaMu just had its ratings cut….again…Means that Paulson may have two things on his “to do” list this weekend.

There are already rumors that Washington Mutual is on the auction block.

In the real economy, the one that the rest of us live in, news ain’t great. The weekly job claims fell, but the 4 week moving average and the continuing claims, continue to rise.

Additionally, retail sales fell again in August, showing a continued weakening in the economy, as does the large gain in business inventory.

Real estate is looking worse and worse too, with foreclosures continuing to increase.

This has driven the dollar down, because it points toward the Fed cutting rates.

In energy, oil is continuing on a downward trend, because of hurricane Ike, selling briefly below $100/bbl (!), though the fact that it’s heading toward refineries is driving gasoline up.

I would note that this is actually normal market behavior. Knock out refineries, and the demand for oil decreases, and the price drops, but the demand for gasoline remains the same, so prices increase.

BTW, I’m not sure what is going on in insurance, but it is clear that American International Group is getting absolutely hammered, and when the subject of the short selling is the largest insurer in the world, something is whack.

Economics Update

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Things have seemed pretty hectic today.

Normally I don’t mention this, I think that it is just noise, but all three major stock indices are down 3%+, so while it’s not yet raining Katz and Lehmans, it’s pretty ugly.

Note that this is my economic update post, so I’m not going to claim that a certain VP pick’s speech caused anything, and instead point at jobless claims spiking unexpectedly by 15,000, though truth be told, it should not cause that sort of reaction: the weekly data is simply too noisy for any rational investor to act upon the basis of those numbers.

But this isn’t “rational investors” this be Wall Street, so it could have been the Lehman CEO’s choice of shoes today.

The rest of the financial news is no where near as definitive, and even Federal Reserve officials are publicly disagreeing on whether the concern is recession or inflation.

Meanwhile, even though the Bank of England and the ECB kept rates steady, the cost of money in Europe went up, because the ECB has significantly tightened requirements to lend to banks.

In any case, the lack of rate hikes strengthened the dollar.

Mortgage rates are down this week, which would ordinarily be good news, but I think that “the markets” (and I) see this as a sign of a weakening economy, just as “the markets” (and I) see declining oil prices and declining gas prices as signs of a weakening economy.

Even so, the numbers for the service sector were good, so the blood on the street today is a bit odd.

Of course, it sucks to be a bank right now, with Community National Bank of Sarasota looking to be on the FDIC’s Friday afternoon press releases, and Lehman floating the idea of creating a “bad bank” to shift bad assets to.

Someone needs to explain the concept to me, because it seems to suffer from the, “We’ve run out of gullible idiots,” problem.

In any case, it appears that insurance giant AIG is considering something similar.

I’m not sure how piling crap in a separate pile really helps anything.

Economics Update

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Well, the big news is that the US GDP rose by an adjusted 3.3% rate in Q2. The initial estimate was 1.7%, and the estimate for this, the 2nd cut on GDP numbers was 2.7%.

Of course, inflation ran at a 4.2% rate, which puts it back into negative territory, though the economists typically use the “core” rate, 2.1%, even though purchasing energy and food is included in the GDP numbers.

This is reinforced by the weekly unemployment numbers, with new claims down by 10,000 this week, but, “continued claims are now above 3.4 million for the first time since 2003.”

What is going on is that the real estate asset bubble was concealing the fact that productivity from 2000 through 2007, but middle class income fell.

We were working harder for less money, and going into debt because our houses were appreciating.

Things ain’t great in Europe either, with European retail sales falling, though German unemployment fell, even while the German economy contracted….I really don’t get that one.

We do have good news on the monoliner insurers, with MBIA getting a juicy insurance deal thanks to the help of the New York State Insurance Superintendent…..Smells like a backdoor bailout to me.

In the world of home mortgages, it appears that numbers showing a mortgage application increase may be garbage, because they do not account for multiple applications from one person, which is what tends to happen when lenders get pickier about issuing loans.

Finally, oil is down, the dollar is up, and gas prices are down again, more than 45¢ off their peak.

And Now Phil “You’re All Whiners” Gramm Will Bankrupt the FDIC

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It appears that Gramm-Leach-Bliley created an instrument called a Certificate of Deposit Account Registry Service (CDARS) that allows you to deposit money in a one bank, and the CD is divided across a network, allowing for, “FDIC insurance on deposits of up to $50 million.”

Yet another way that Phill Gramm is a cancer on the body politic and the economic fabric of America.

Ratings Agencies Begin to Upgrade Government Bonds

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At least Moody’s is.

For years, corporate debt has been rated higher than equivalent government debt, and once the monoliner insurers started to implode, municipalities realized how much of a racket it was, with the ratings agencies using a stricter standard, so that the government debt had to use insurers where the rater’s brother-in-law worked.

Took long enough, and I’m sure that the fact that various Attorneys General were looking into this, and that there was a bill in congress, had nothing to do with the change.

Economics Update

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Well, we are now seeing reports that the FDIC is going to have to raise premiums to cover losses from bank failures.

They should have started last year.

Meanwhile, the Chinese economy is showing signs of significant inflation, with China’s wholesale prices rising 10% year over year in July.

The problem here is that the obvious solution, the central bank raising interest rates, will server to further weaken the dollar, which will drive their exports down….Catch 22.

Meanwhile, it appears that Morgan Stanley has problems, because Moody’s just cuts its credit rating to A1 from Aa3 because of losses in the mortgage market.

Interestingly enough, even though Georgia and Russia are in something very close to a war, and the Georgian pipeline is a crucial link for Europe, oil is down, largely on the Iranians agreeing to a new round of negotiations on their Uranium enrichment program.

Gasoline is down again, for the 25th day in a row.

The dollar rose today, probably as a result of concerns about the conflict between Georgia and Russia, which tends to send money fleeing to the relative safety of the US dollar.

And in the, “Funnier if it weren’t so true” department:

Economics Update

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Well, Fannie Mae just posted a $2.3 billion loss, cut its dividend, and is will no longer buy and resell Alt-A mortgages.

That sound you hear is the housing market seizing up, and it does look like mortages will be getting more expensive, and given that the spread between LIBOR and Treasury Bills, the so called “TED Spread”, remains at near historic highs, I don’t really see any unfreezing in the near to medium future.

However, the the US dollar is on a tear right now, and a strong dollar attracts investment, which means that there is more money out there to lend, which might make loans cheaper.

I still think that current interest rates are unsustainably low, but YMMV.

Oil and gasoline are down, as are commodities like copper, silver, and gold.

This points to declining inflation, good news, but only because there are real signs of a deep, hard recession, which is bad news.

The fact that Productivity growth has slowed points to a slowdown too.

I wonder what the moderation in commodities will do to wholesale inventory numbers, which have been up because of price appreciation in said commodities.

BTW, a monoliner insurer just went belly up. ACA Capital Holdings Inc. just terminated $65 billion in credit default contracts, and turned itself over to creditors.

BTW, as a result of the IndyMac implosion, people are starting to split their bank accounts among multiple banks, to ensure that they are all completely covered by FDIC insurance.

I think that we are seeing a generational shift in the attitudes of people about finance and investing.

Economics Update

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Well, the jobless numbers came out, and they suck. The weekly numbers rose by 7,000 to 455,000, a 6 year high, when predictions were for a drop to 433K, and the 4 week moving average, which is less noisy, rose to 419,500, a 5 year high.

At least our misery has company, with the ECB holding rates steady, saying that “risks to economic growth were starting to materialize”, which is a signal that Euro zone rates will remain steady.

Of course, our relentlessly optimistic financial press has to try to make s%$# into Shinola in housing, where they are touting a 5.3% month to month gain, which as Barry Ritholtz so eloquently notes, this is unmitigated crap, and driven by seasonal differences more than anything else, and the numbers are down year over year.

Additionally, we do not know how many of these are short sales in lieu of foreclosure.

We also have retail experiencing major suckitude now that the rebate checks have run out. To the degree that people are spending any more, it’s on necessities, and they are running up their credit cards to do this, because the banks are cutting back on HELOCs.

Meanwhile, oil rose on supply concerns after Kurdish rebels blew up a Turkish pipeline, though gasoline is down for the 21st straight day.

In the world of insurance, the largest US insurer, American International Group wrote down more than $11 billion in holdings, and is making noises about selling more shares to raise capital.