Banks Suffer Losses From Bets On Their Employees' Deaths

Here's a good parable of our highly advanced service economy. Not only can we make money doing each other's laundry, but now we can make money out of each other's death.

Banks have been buying life insurance policies on their employees, not for the workers' benefit, but rather for their own. If the employee dies the bank gets an insurance payment that is tax free. They can report the death payments as quarterly income. If an employee dies the survivors must certainly turn in a death certificate for the company benefit program. This gives the banks the proof they need to collect on a life insurance policy on said former employee. (That's the hitch by the way, in case you were thining about taking out blanket policies on the unsuspecting.)

The lawsuits are not related to this particularly ghoulish scheme. Rather, the suit is against insurance companies that apparently invested the premium payments in some dodgy places, including a Falcon Hedge Fund run by Citigroup which is faltering.

This raises some interesting questions. First of course is the quality of bank earnings, which are pretty poor. Secondly is the obvious tax loophole here. Its one thing for a death insurance payment to be tax free to a spouse or a family member. But to a bank taking out blanket policies on their employees? Gee if it works, why not expand it. Think of the possibilities. China and India take note.

But secondly, if insurance companies managing life insurance for banks death-to-our-employees-for-the-sake-of-the-bottom-line programs are hurting because of investments, isn't it logical to wonder how they are doing on your own life insurance policies? How about your pension plan?

See, this is far from over. The reverberations of this Ponzi Scheme are going to travel through our economy. At the least we will see the dollar take a further hit as the Fed, on behalf of its banking owners, spreads the losses to all holders of dollar assets to essentially bailout the banks.

Welcome to our Human Resources Meeting. Sorry, the company is cutting back on healthcare benefits again. Here have another doughnut. The quarter is almost over.


Citigroup Hedge-Fund Loss Weighs on Three Banks
By DAVID ENRICH
May 20, 2008; Page C1
Wall Street Journal

The downward spiral of a Citigroup Inc. hedge fund has caused steep losses for at least three large U.S. banks that hoped it would rev up returns on a controversial type of employee life insurance.

Besides triggering a lawsuit against an insurer and brokerage firm that arranged the hedge-fund investment for Fifth Third Bancorp, the losses may pressure Citigroup to give the banks some of their money back, as it has agreed to do for individual investors. Such a bailout would be costly, because the clobbered banks sank more than $1.6 billion into the hedge fund, according to the lawsuit and people familiar with the matter.

The collapse is another headache for Citigroup's new management, led by Chief Executive Vikram Pandit, as it tries to rebound from crippling losses that stemmed partly from inadequate risk controls. Falcon's descent has caused a handful of high-level brokers to quit in frustration. Citigroup is spending $250 million to allow retail investors to exit from their positions without absorbing the fund's full losses.

Falcon also attracted major banks that invested in the hedge fund as part of their bank-owned life insurance programs. Wachovia Corp., the fifth-largest U.S. bank by stock-market value, was the most heavily exposed, with more than $1 billion invested, people familiar with the situation say. The stake represented at least 7% of the Charlotte, N.C., bank's $14.9 billion in BOLI-related assets as of March 31.

Fifth Third, of Cincinnati, sank $612 million into Falcon, according to the lawsuit the regional bank filed last month in U.S. District Court for the Southern District of Ohio. That was about a third of the bank's BOLI assets as of Dec. 31. Another regional bank also invested a sizable amount, people familiar with Falcon's operations say. The name of that bank couldn't be determined.

In such bank-owned life-insurance programs, banks buy policies on their employees. When employees die, the banks collect. Because the income is tax-free, some critics contend that BOLI is a tax shelter.

Last year, nearly 700 banks reported holding a combined $117.5 billion in their BOLI accounts, according to Michael White Associates LLC, a bank-insurance consulting firm in Radnor, Pa., and executive-benefits firm MullinTBG, of Deerfield, Ill.

In recent years, many banks have grown aggressive with their BOLI programs, putting premiums into investment vehicles that let the banks record quarterly profits -- or losses. Quarterly profits or losses are tax-free, and the policies still pay when employees die.

Falcon began stumbling last fall and by March 31 was valued at 20% of the original value, according to Citigroup documents. Fifth Third, which reaped $238 million in gains on its BOLI portfolio in a three-year period, suffered a BOLI-related loss of $177 million in the fourth quarter and a $152 million loss in 2008's first quarter.

At Wachovia, Falcon's woes caused the bank's first-quarter loss to widen to $708 million from its previously announced $393 million loss. Wachovia didn't identify the exact source when it disclosed May 6 that it had a $315 million loss on its BOLI investments, but spokeswoman Christy Phillips-Brown confirmed that it came from Falcon. She wouldn't comment on the size of Wachovia's investment in the hedge fund or whether the company plans to pursue legal action.

The market's turbulence has hurt BOLI results at other banks, too, from tiny Evans Bancorp Inc. in Hamburg, N.Y., to regional bank BB&T Corp. The Winston-Salem, N.C., bank had a loss of $15 million on its BOLI portfolio in the first quarter. Spokesman Bob Denham declined to say whether BB&T was a Falcon investor, though any future losses "will be small."

A Citigroup spokeswoman wouldn't comment on the fund's impact on banks. Citigroup has said that Falcon was marketed only to sophisticated investors.

In its lawsuit, Fifth Third alleges that Transamerica Life Insurance Co. and Clark Consulting Inc., both units of Dutch insurer Aegon NV, "utterly failed to properly manage and monitor" premiums that were invested in Falcon. Citigroup isn't named as a defendant. A Fifth Third spokeswoman declined to comment.

Cindy Nodorft, an Aegon spokeswoman, counters that Fifth Third "was free to choose from a number of investment alternatives that they were familiar with," adding that the "terms of the policy were adhered to."

Ms. Nodorft wouldn't say whether the Aegon units placed other banks in Falcon. "We continue to work closely with Citigroup as well as other financial institutions to address the developments in market conditions," she said.

Write to David Enrich at david.enrich@wsj.com2

Banks Suffer Losses on Bets on Employees Deaths