Archive for the ‘bailout’ Category



One of my favourite blogs is the Money Illusion written by Scott Sumner. He’s risen to some prominence in the blogosphere because he’s giving a coherent, convincing narrative and counter-factual narrative of the crisis. Great stuff and highly recommended.

Except that he wants to destroy insurance companies.

Basically it seems that his point is that we need to avoid a nominal decline in GDP, even when real GDP growth is negative. I’m not an economist, so I won’t get into the macro here, but suffice it to say that he presents a very convincing argument. Tyler Cowen says this is the “best free lunch I’ve seen in years”. Yikes.

My comment is that because inflation is a transfer of wealth from creditors to debtors, insurance companies, the backstop of the world, get screwed. Massively. See here [warning, boring insurance press alert].

What’s one to think of this?

Well, I can think of a few consequences:

1. Insurance premiums go up, especially for long tail lines of business

2. Maybe we’re finally going to find that hard market.

3. There’s going to be no refuge, because Scott wants everyone to inflate simultaneously.

4. Maybe bank-insurance mega-conglomeration is the optimal strategy. The banks go mental and nearly bring the system down while old fogey insurance companies, being the last outpost of solvent capital, lose their shirts in the ensuing inflation. If they merge, at least nobody goes down.


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I pay a lot more attention to the blogosphere than I ever have (or will) to the “pundits”  in the MSM. The reason is simply that I think bloggers operate in a more intellectually competitive environment. That, and that I can get a massive dose of commentary and links about the relatively narrow range of my interests every day.

That doesn’t save them from availability bias, though. Take Steve Randy Waldman, possibly the most compelling combination of originality and coherence in financial commentary. His post today is finally tipping my opinion away from his views, though. I’m hardly in a position to line myself up against Steve, Felix, Krugman (etc etc etc) and declare that nationalization is a bad idea, but I’m starting to wonder who really knows what they’re talking about.

The case for nationalization has been made and, I think, hasn’t been refuted in any strong way. This was clear in January. Obama has said his problem isn’t that the idea of nationalization sucks, it’s that he views the execution risk of that strategy to outweigh the downside risk of not doing it.

What was the commentators’ response? Mostly they came up with ideas for why it isn’t such a big deal to execute this strategy. It makes me think these people have never executed a damn thing in their lives. You don’t sit around and think about it, you put together a detailed plan, screw it up and hope that your screw-ups aren’t enough to sink the ship. It’s messy, extremely complex and often very boring.

Most of all, it isn’t suited for blogging commentary because bloggers aren’t willing to spend more than, at most, an hour on a single post. The kind of feasibility study this scale of bank nationalization requires would take hundreds of (man-)hours. And it would be wrong.

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Stick ’em Up

Go Ahead, Make My Day

I'm gonna blow the hair off your head

I’ve been wanting to do an AIG roundup, so here it is.

AIG has released a supposedly confidential document (H/T CalculatedRisk) that lists out all the things that AIG does and tries to give a flavour for all the various exposures different companies have to it.

It looks like it’s supposed to work like a mob boss asking a reluctant extorion victim, “So, how’s your wife and kids?”, the implication being that he has the guy by the balls.

AIG is trying to make the case that it is some kind of near-monopoly and its failure is armageddon. But it is not; at least, in insurance it is not. The insurance industry is going to be fine and every executive worth worth a damn is itching to write the bejesus out of the market as soon as AIG gets ITS balls clipped by unkie Sam.

Speaking of those executives, they’re coming out and slamming AIG publicly.

First, there’s Brit (HT: ReinsuranceGuru)

He added that AIG – which has a large UK presence – was “haemorrhaging teams of people” but still winning business. “In order to win business they are offering premiums so low they are unsustainable,” he said.

And Liberty Mutual‘s Ted Kelly

In a conference call to address Liberty Mutual’s fourth-quarter earnings, Kelly said the federal money given to American International Group Inc. gave it an unfair advantage, allowing the struggling enterprise to be “overly aggressive.”

I think that one or two of these guys are going to really start cranking out the public statements because AIG is very sensitive to publicity and they’re possibly more ready to swipe AIG’s lunch than they were 9 months ago. Shareholders of insurers are going to make a killing at some point because of this.

Lastly, for the geeks out there, there’s a great post at a new blog on credit trading that goes through AIG’s strategy, describing it as being a nice combination of arrogance and regulatory mismanagement. 

My big question after this whole mess subsides is: what’s going to happen with the rating agencies?

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95% of the interesting parts of my education have come long after I graduated from University and much of that 95% has come from the links in that blogroll to the right.

I’d say the most consistently informative link is to Econtalk with Russ Roberts. It’s a podcast that I listen to religiously. I’m so happy I didn’t get a graduate degree in economics because it would have been a waste of time and money. I get all the learning I want for free!

For instance, I had never heard of Public Choice Theory before a few months ago, but it has given a framwork for so much of my intuitive reactions to politics and economics.

THIS, from Dave Henderson, is why government scares me. It’s a wonderful peek into the birthplace of power and how horribly mangled ideals become at the hands of powerful individuals with some kind of agenda and horrible hair.

The basic idea is that a prefectly sensible amendment (which prevents those who misrepresent something in their mortgage application from getting a handout) was made to a bill in committee, passing 21-3. The bill was then changed to neuter the amendment without a vote and sent to Congress.

Ouch. Read the comments.


Update – I nearly didn’t put this in, becaue the chain is so long, but this is by Stan Collander  (from Yglesias via Cowen)

Lost in all of the debate (and the reporting about the debate) on the earmarks in the omnibus 2009 appropriations bill the Senate is still working to adopt is the basic fact that cutting earmarks doesn’t save any money.

This is not open for discussion.  An earmark simply is a congressional decision to allocate part of appropriation for a particular purpose.  Eliminating the allocation doesn’t reduce the appropriation, it simply leaves the allocation decision to a federal department or agency rather than to Congress.

Emphasis from Yglesias. The point here is that there is no such thing as the Government. There are politicians (individuals all with talents, agendas and faults) and bureaucrats (with much the same). Which do you prefer? I say it doesn’t really matter.

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Whose side is time on?

AIG is playing for time.

The reason for this is NOT that the economy is bad and there aren’t any buyers. The insurance industry is arguably the last outpost of capital – since 2005 they have benefitted from high rates and low incidence of catastrophic loss – Ike is the first disaster of any consequence since Katrina. And insurers just bank record profits as capital.

So why isn’t anyone buying AIG’s companies? Because they don’t have to! They can take the employees (because working for the government isn’t fun)and let the corpse rot. Why on earth would they want to buy?

The longer AIG waits, the less valuable its companies are going to be because of employee and business attrition. They can only keep the business by cutting rates (bad) and can only keep the employees by paying them tons of money (ha). EVERYONE in the business can’t wait to nick AIG’s lunch.

The American taxpayer is going to get totally screwed.

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Ego Defense

So sunlight is slapping AIG in the face a bit. We’re finally getting a bit of detail about where the money went.

Generally, there’s a pattern here which is pretty common and it has to do with ego defense. My belief is that there is no such thing as an “organization”, which we anthropomorphize. Instead we have a group of individuals at the top that react as people.

So, when AIG made a bunch of really big mistakes its leaders succumbed to ego defense mechanisms. Old man Greenberg would probably froth at the mouth with ‘projetion’, but the new guys wind up with some combination of ‘denial’ and ‘reaction formation’. As is the case with any web of lies, it inevitably falls apart.

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Hank Greenberg:

“That is an outrage,” Greenberg said of the plan by Reynolds, former CEO of auto insurer Safeco. “All that does is tell everyone working there to start looking for a job, and why would business hang around?

This is in response to Reynolds saying that they’d be willing to dismantle the whole company to pay back to the government.

I have two problems with Hank, here.

1. An insurance company can have only two competitive advantages: a) financial stability (AIG was AAA) and b) talented people. If you lose a), b) doesn’t mean jack.

2. A real plan for moving AIG forward requires a cold, hard look at what is, in fact, possible. Taking the main insurance businesses off the sales block is complete fantasy. An obviously lying executive does not inspire confidence, she destroys it.

Hank ran AIG for years and it meant more to him than anything, even, arguably, his family. It is killing him that his company is dying, which is understandable. But don’t for a second believe that this egomaniac cares about shareholders, taxpayers or employees of AIG.

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