COMPLIANCE: All That Glitters

Matt Taibbi’s latest anti-Goldman polemic was posted on line this last week (Rolling Stone, 11 August) under the poetic title “Goldman: New Reform Law Can Kiss Our Ass.”  In it Taibbi makes the point – long obvious to readers of this Screed – that Goldman executives “don’t expect the new financial regulations to cut into their profits in any meaningful way.”

 

 

COMPLIANCE: All That Glitters - chart1

 

 

As with so much current anti-Wall Street invective, Taibbi aims his gonzo prose at a paper tiger.  For if the Goldmans of the world have nothing to fear, it is thanks to those who make the laws.
 
Case in point: the tempest in the backroom beer keg over death benefits for survivors of military personnel who die in action.  This story was broken by Bloomberg (29 July, “Veterans Agency To Probe Insurers On Soldier Benefits”).  (Full disclosure: our CEO, Keith McCullough, is a Bloomberg TV Contributing Editor and regular guest and co-host.)  Suddenly, everyone from the New York State Insurance Department, to the Senate Veterans Affairs Committee, to the White House is calling for “the VA’s immediate investigation into these unacceptable insurance companies’ practices.”
 
The “unacceptable” practice is, life insurers retaining these death benefits in their own corporate accounts, rather than sending lump-sum checks to the beneficiaries.  The company keeps the interest earned on the balance, and until the balance has been withdrawn by the survivors, pays what the Bloomberg story calls an “uncompetitive interest rate,” pocketing the spread.  The beneficiaries receive a book of drafts which they can use to withdraw all, or any part of the death benefit at any time.  Complaints about this practice have already been thrown out of court (Wall Street Journal, 6 August, “Courts Often Back Insurers’ Death-Benefit Practices”).  Not only is the practice legal, it is embedded in current insurance industry regulations.
 
Let’s ask a different question.  “Unacceptable” to whom?   Prudential, the company in the Bloomberg story, is the second largest insurer.  You can bet that every state regulator knows about this practice.  As well as every Senator and Member of Congress who has any dealings with the insurance industry.  The task of protecting the public, you see, is tempered by the awareness of which side of the pork-roll is larded.
 
Now those who make the laws and regulations that have long encouraged this practice are attacking the companies that do it.  And by the way, if this practice looks Structured Notes, it is because the insurance company, rather than segregating the death benefit in a separate account in the name of the beneficiaries, makes an accounting entry, making the death benefit an IOU of the insurance company.  But unlike the “guaranteed” structured notes, the benefit is protected by state insurance authority guarantees.  In fact, states have paid out on such guarantees when the insurers could not come up with the funds.  Guess the regulators were aware of this “unacceptable” practice all along.
 
Prudential, whose stock trades on the NYSE, has a market cap of over $26 billion.  Its current dividend yield of 1.2% makes it a more attractive income instrument than many money market funds – including, apparently, the rate of interest it pays to survivors.  Let’s face it, insurance companies don’t make money by paying out claims.
 
According to the website opensecrets.org, “in 2007 and 2008, the insurance industry contributed a record $46.7 million to federal parties and candidates…”  The industry spent $164.4 million on lobbying in 2009, and $85.9 million so far this year.  Prudential, the third-largest lobbying client, has spent almost $4.7 million year to date.
 
“Unacceptable”?  We think “ungrateful” is more like it.  Legislators and regulators have a fine line to tread in going after the insurers.  It is only a question of time before the industry will tire of feeding the hand that bites it.
 
 
 
Moshe Silver
Managing Director / Chief Compliance Officer


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