Thursday, May 05, 2005

Can You Insure Against A Housing Bubble?

Finite reinsurance is a term anyone concerned about the housing bubble should become familiar with. All those mortgage backed securities have guarantors and they like to spread the risk with reinsurance. The problem is they are complicated to account for and more than one firm is in trouble.

Example, AIG and the former power suit of them all, Hank Greenberg. "The Federal Bureau of Investigation has become the latest regulatory agency looking into the potential abuse of so-called finite or non-traditional reinsurance - the products at the center of AIG's accounting troubles."

"The giant insurer also said Sunday that some of its controls over financial reporting weren't up to scratch. One problem was 'the ability of certain former members of senior management to circumvent internal controls,' AIG said."

The rating agancies have presided over this mess but are trying to get back on top of the issue. "'Under the Microscope' is an apt theme for Standard & Poor's Ratings Services' twenty-first annual insurance conference to be held June 13-14 in New York. CEOs and other senior executives from leading companies such as AIG, Aon, CNA, and XL Capital, along with Standard & Poor's credit analysts, will be assessing key industry issues."

"Among the conference sessions: Is there 'Good' and 'Bad' Finite Reinsurance? How can the product be bought and sold with confidence that it's accounted for correctly?"


At 5:25 PM, Anonymous e- said...

i'm about to buy life insurance. i've just begun accessing the relative financial health of the companies. is all my effort going to go to waste? how will i know if the company i choose will be involved in this?

At 5:54 PM, Anonymous Anonymous said...

The pin?

At 6:14 PM, Blogger deb said...

Thanks Anon 5:54:
I don't know enough about the banking side of things. The new rules from the OCC state that it will move against the lenders it regulates if they make "subprime mortgage loans that involve a payment schedule in which regular periodic payments do not cause the principal balance to decrease."

Will this dry up liquidity? How fast? What lenders does this affect?

Any bankers out there? Tell us what this means. It sounds HUGE.

At 7:15 PM, Blogger Ben Jones said...

I'll have something on this in the AM, if no one else comes up with an answer.

At 9:42 PM, Anonymous Don said...

Just FYI, that article is 2.5 months old.

At 8:46 AM, Anonymous powerpuffgirl said...


I keep seeing similar comments about the OCC's new rules. One story I heard said that by September 1st, the OCC was going to crack down on interest-only loans and force lenders to convert said loans to more traditional loan products.

I can't find anything definitive on the subject and I don't know if the OCC has the power/authority to pull it off. Hopefully somebody can shed some more light on this.

On another note, Jubak has a pretty good piece on the new 30yr. bond the Fed is going to issue and how it signals a return to much higher inflation and long interest rates.

At 11:50 AM, Anonymous Rob said...


I'm no economist, but I don't see how we can digest this debt bubble
without deflation. Unless you believe wages are going to catch up. The market is too high and too leveraged, and speculators have no incentive to wait years for wage increases, they will be out of the market.

But reintroducing the 30yr sounds like a preparation for future inflation. Could it be a head fake?


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