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Archive for December, 2008

Hank Watch

It all started yesterday with the Undertaker, teddy liddy on CNBC and continued today when Hanky thought he should weigh in again. Both are interesting interviews and both were pretty wildly mischaracterized by the press.

Hank calls teddy a liquidator, which is probably a pretty good characterization of his role. Remember, teddy was asked by the guv to swoop in and get AIG to pay back its loan and earn a single clam for his troubles. He IS a liquidator; he doesn’t really know the business, as Hank points out, and he doesn’t need to. He’s basically a politician right now, playing politics with the people and with congress over AIG’s fate. I wonder what office he really wants as his reward for this job?

I can summarize the interviews thusly:

teddy: I was hired to destroy AIG, but in order to do so, I need to do some things that don’t look good politically. My job, then, is to sell the public on my actions so congress doesn’t freak out and I can run for the senate or get a plush job if the palinator wins in ’12.

Hank: I love AIG more than my family. I want to try to convince everyone that my baby deserves an assload of cash because if this system is about socializing losses then, doggonit, it just wouldn’t be fair if it misses out. I will do so by being a terrible interviewee and cranky old man.

My only problem with Hank is that he seems to think that AIG has some kind of platonic value in of itself and therefore should be saved at all costs. Unfortunately, nobody who didn’t work for AIG would ever feel that way – all we see is a spectacular failure that will destroy the company because that’s what the company deserves. If you bet the farm and lose, guess what. No more farm.

And I don’t buy his argument that AIG’s problems are isolated and we should just cut away the cancer and move on. AIG tried to wring every bit of value it could out of its AAA rating; its financial products division couldn’t exist without the diversifying support of the insurance business. The risk managers should have realized the farm was being bet and they didn’t. So no more farm.

Hank closed by citing his belief that there is a Goldman Sachs conspiracy out there and that GS counterparties are the first ones being saved. Could be true – I’ve never known anyone in financial services to not take any advantage they could find and GS alums DO populate a lot of the powerpoints in the US economy.

All in all, Hank did ok today.

It kills me to say it because I much prefer the image of a Willy Loman/Sauron lovechild raving about how everyone is getting it wrong while silently screaming that he did so much better. Instead I get the most successful insurance executive of all time at 80-something delivering basically sensible comments about his former company.

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Well, Look at You, Ted!

What’s all this truth-telling about, anyway?

“Anybody who wants to start an insurance company or beef up their position, they
will come to our organization and pick people off,” Liddy said in the interview.
“If that happens, we can’t maintain the businesses we want to keep and we won’t
be able to sell them for the kinds of values that we need.”

Looks like Ted’s buddies at Congress have scared him straight – he’s actually resorted to being honest. Problem is, he’s got a helluva long way to go and honesty obviously doesn’t keep you from the egg nog:

The insurer “would like to” pay back the $60 billion loan in 2009, Liddy
told the financial network in an on-air interview today.

Yeah, Ted? Wanna pony for Christmas, too? I’m sure someone out there would be happy to swap you one for your crown jewels (no, not THOSE CJs; you’re all so dirty).

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Residual Value

The financial markets valued AIG, on average at ~177bn from 2004-2007.

AIG now owes the government 100bn.

AIG might have to write down another 30bn, while everything that’s left is slowly being destroyed.

So what do you sell?

Cumulative operating profit from 2005-2007, which crosses both profitable and unprofitable years:

General Insurance (keeping most of this): 23,253m
Life (keeping most of this): 27,272m
Asset Management (um…): 4,665
Financial Services (ha): -4,708m
Other: -6,340

Remember, this EXCLUCES 2008.

What on EARTH are they going to sell? Hank wants to cut the interest rate and pay Uncle Sam back with future profits.

Let’s get one thing clear, Hank: your baby failed big time. Sorry it hurts your feelings so much, but taxpayers don’t give a damn about AIG, they just want their money back. YOU want AIG to survive. AIG’s owner does not.

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Proportionality

So the former execs of Gen Re and AIG are about to feel the sharp bite of… justice(?).

These guys would probably admit that they were crossing a line between insurance regulatory allowances and the usual GAAP and tax law, but it’s not like they were stealing for personal enrichment. They were conducting regulatory arbitrage. Ever heard of it? But why are insurance companies regulated differently?

The best way to think of an insurance company is as a pool of cash that can be claimed on by several parties:

1. Policyholders who have bought insurance;
2. Bondholders who have leant the insurance company money;
3. Shareholders.

Obviously there are limitations on these claims – policyholders are allowed to claim up to the limit of their policies, bondholders to the total amount they’ve loaned. The thing is that if you’re imagining the pool of cash that is the insurance company, the bondholders’ portion is probably the size of a bathtub but the policyholders’ portion is something like the size of an inland sea.

This is possible because the policyholders don’t need an inland sea’s worth of water, they only need, in the aggregate, a swimming pool’s worth. Regulators tell the insurer roughly how big the pool needs to be at a minimum and lets them at it.

The ability to stuff a sea of liabilities into a pool is a pretty neat trick. These liabilities don’t disappear, of course, they’re just recorded as income and expenses, as I’ll explain below.

In summary, when you are willing to pay a few drops of water in exchange for the small chance that you’ll need a bucket in return you’re called a POLICYHOLDER.

Now, when you are certain you’ll need that bucket of water in the future you just hand over the whole bucket up front and you’re called a LENDER.

You are now at the line that was crossed by our villains above.

What they did was issue a LOAN and call it INSURANCE. In year one pay the premium (expense) and reduce profits. In year three make a claim (income) and increase profits. No risk=no insurance, but that disctinction wasn’t quite so clear back then. Pretty crafty and definitely wrong.

But a lifetime in jail? Come on…

ADDENDUM: not quite so punitive after all. Thank goodness.

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Private Healthcare

I heard something truly horrifying on a podcast I listen to each week. It’s about how the US healthcare system works.

Apparently much of the health care system is the US is subsidized. These group payers (government, some private insurers) pricing that individuals can’t match. In any normal business that I can think of, these kinds of deals are multually beneficial because since the supplier locks in a larger volume of its service it is willing to do so at a lower margin.

Somehow, though, these negotiated deals go too far (who forces this? Government?) and hospitals lose money on the subsidized patients. So what do they do? Supercharge the private patients’ bills to make up the margin.

My god, what a terrible system – talk about exploitation.

When you take your car into the garage you’re always suspicious about being ripped off. You need a hell of a lot of knowledge to verify for yourself whether you actually need all those hoses and insulating rings or whatever replaced. But if you really feel like the procedure isn’t worth the money, you can substitute other means of transportation for that car – buy a new one, rent one, borrow one, take the train, walk.

With healthcare, you have only one choice. Pony up.

People are at such a disadvantage with a lot of health procedures that they can be exploited very very easily. And exploited they are, it appears, to the benefit of those insured by large companies and the government.

Obviously the money has to come from somewhere and these people should just ally themselves with one of those insurance companies and I completely agree that free resources are abused. I just think it’s really ugly that the system relies on a subset of society (who may not have the means and are as a result dealt crippling financial blows) subsidizing the rest of it.

This is a classic example of a system that tries to get the efficiency of markets and the equality of subsidy and utterly fails at both. Disgusting.

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Valuations

I wonder how articles like this one will age. I suspect not well.

Is AIG is going to get anything like the valuations cited?

There’s a pretty big difference between the 94b – 122b and the 4.5ish billion market cap for 20% of the company(gives you 22.5b).

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Hank Watch

I started reading this article feeling vindicated, but then our old friend Hank dropped this bomb:

Greenberg, who left AIG in 2005 and now runs several private insurance and
investment firms, said there is little cross-over between his business and AIG,
but where there is, his staff say AIG is beating down the market.

(emphasis mine)

Huh?!

First of all AIG is in EVERY market. Second of all, what else would an egomaniac like this guy do except try to build AIG again?

Give me a break.

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