Life Insurance Companies Braced for Heavy Losses

The easy times, the extended bull market in equities and corporate profits, with a disinflation and an easy money policy, created a lot of very wealthy people who managed other people's money by riding the incoming tide of the Greenspan era and a willingness to use the world's reserve currency to run up incredible levels of debt.

The disparity of wealth in the US from the wealthiest few to the less fortunate many has never been greater since the start of the Great Depression. And if history repeats there will be a tremendous effort to make the public pay for most of it.

Privatize the gains, but socialize the losses. Having the public bad bank buy the bad assets of the big money center banks and financial ponzi schemes and take all the losses is a thinly disguised act of theft and injustice on an almost incomprehensible scale.

There will be no lending until we drive the bad assets out of the insolvent banks. And the way to do this is to restructure the banks and write off their bad debts, and apportion the losses to the shareholders and credit holders, while backing the individual depositors and guaranteed pension funds one hundred percent.

We cannot continue to subsidize a few big money center banks from their losses, and call anything in our government a republican democracy of the people, by the people, and for the people.

"Nationalization" does not mean that the government will run the banks. Nationalization means that a body like the FDIC will take an insolvent bank, liquidate its assets, arrange for the payment of creditors, and either sell the assets to other banks, or allow a solvent bank to emerge from the process. This is what the FDIC does with any bank that fails, that is not a a powerful manipulator of the political process.

A 'bad bank' or a guarantee of private banking assets by the government is the subsidy of private losses by public money. It is a continuance of a fraud.

We either have a free market, with both gain or loss, or we have a managed economy where the Federal Reserve Bankers and ex-bankers decide who succeeds and who fails, who gains and who loses, who commands and who serves.

No matter who pays for it, the party is over.

Bloomberg
Insurers’ Corporate-Bond Losses May Exceed Subprime
By Andrew Frye

Feb. 3 (Bloomberg) -- Corporate debt defaults may cost U.S. life insurers “substantially” more than losses on securities linked to subprime, Alt-A and commercial mortgages, said Eric Berg, an analyst at Barclays Plc.

Corporate defaults are poised for a “significant” increase this year as the recession deepens, Berg, based in New York, said in a research note yesterday. The American Council of Life Insurers estimated the industry, led by MetLife Inc. and Prudential Financial Inc., holds $1 trillion in corporate debt.

“None of the life insurers we studied appear to be doing a particularly good job” of picking bonds backed by companies, Berg said. “Understandably, investors are concerned.”

Life insurers have plummeted in the last year in New York trading as investment losses and guarantees on slumping retirement products sap capital. Hartford Financial Services Group Inc. leads the industry with $7.9 billion in writedowns and unrealized losses tied to the real estate market since 2007, while New York-based MetLife has accumulated $7.2 billion, according to Bloomberg data.

Hartford and Prudential have cut jobs, asked regulators to ease reserve standards and applied for aid from the government’s $700 billion rescue program to replenish funds after reporting net losses in the third quarter. MetLife sold $2.3 billion of stock in October to bolster finances. The Standard & Poor’s Supercomposite Life & Health Insurance Index has declined about 60 percent in the last 12 months...

Corporate and US Treasury Yields from 1926 to 1934

The Bonds held up much better than one might have expected, and the spreads between corporates and longer dated Treasuries was remarkably uniform.

Bear in mind that these are yields on this chart, and the value of the underlying bonds moves in the opposite direction to the yield.

Deutsche Bank Surprises Bond Markets By Failing to Redeem its Bonds

It really doesn't seem all that bad to us, compared with the US banking tradition of throwing yourself on the doorstep of the New York Fed and ringing the bell, threatening to collapse the economy until you are bailed out.


The Financial Post
Deutsche stuns market by delaying bond redemption
By John Greenwood and Jonathan Ratner
Wednesday, December 17, 2008

A move by Deutsche Bank to go against industry practice by passing up an opportunity to redeem a chunk of subordinated debt has escalated the level of turmoil in financial markets as investors worry that problems at the German financial services giant might be greater than imagined.

Meanwhile, at least one analyst is speculating that Canadian banks could follow suit on a portion of the more than $3-billion of bonds that they have coming due in the next few months.

Deutsche Bank stunned the market when it said on Wednesday it will not redeem 1-billion euros of callable bonds at the first opportunity. The debt does not mature until 2014, but it has a call date of January 2009, meaning the debt can be paid back as early as next month.

It is a long-time industry practice for banks to redeem such bonds on the earliest possible date, as proof of the soundness of their balance sheets.

Analysts said Deutsche is the first major player to break the tradition.

The move "raises some awkward questions about [the German bank's] financial position," said CreditSights analyst Simon Adamson. "But more than that, it is a signal that banks do not see a return to more normal funding conditions in the foreseeable future, and that is a damaging statement for the banking sector."

"This is a big deal in the bond market," said another analyst who asked not to be named, pointing out that investors have always taken for granted that such debt always gets paid back at the earliest opportunity.

Banks around the world are under the spotlight as investors try to figure out how this episode of the credit crisis will play out, whether other banks will copy Deutsche or whether it will end up as an isolated occurrence.

"We will see if any of the Canadian banks follow suit," said the analyst, adding that they will do so if they believe they can gain by it.

He said there could be several reasons for Deutsche's decision not to redeem. One possibility is that it simply needs the cash and is willing to pay the penalty for later payment in order to hold onto the money longer. A second possibility is that it already has sufficient funding to keep it going for a considerable period and can afford to take a step that would make it much more expensive to access the credit markets. (Oh yeah number two sounds likely - NOT - Jesse)

"Do you want to shut yourself out of the market, which is what you would do?" the analyst said.

You would also shut your competitors out of the market because the whole sector would likely be tainted....