You can either believe that we’re all in this together and it’s all getting better. Or you can believe, as I do, that it is getting better for the few (5%) who own 50% of the worlds’ financial wealth and worse for the other 95% of us. Remember, the next time you see the Dow or the FTSE has gone up, that what it means is the wealthiest 5-10% of your nation just started to pull away from you and your children, that little bit faster than they were doing before. It won’t mean they’ll think to pay more tax, or vote for better health care for you, but they probably will soon look into cutting your wages or off-shoring your job along with their profits.
All in all, it’s a situation which makes whoopey for the few in the short term – which is the only term that counts in finance and politics, where, of course, the 5% live, work and don’t give a fart – and will lead to another crash in just a few years.
I have previously said I think ETF’s will be what accelerates and amplifies the next blow out but not its trigger. I think the trigger could be so many different events it is almost unnecessary to try to guess. In a tinder dry forest, in a long depressing heat wave does it ultimately benefit you to guess from just where the spark will come?
So a good next question would be where will the first fire storms take hold? I think one candiate must be the Insurance industry.
The Insurance industry has just seen the publication by the FSB of the list of Globally Systemically Important Insurers, G-SIIs. I wrote about the G-SIFI list of banks, and what it meant in Twilight of Justice.
The G-SII list contains nine companies with the expectation that others could be added. The list has, of course, been greeted with a chorus of ‘unfair’ and ‘unnecessary’ from the industry.
These companies will now – unless the unthinkable happens and the plans are eventually watered down after successful lobbying from industry experts – I know, I know only a conspiracy nut would even think it – but if that doesn’t happen then these firms will be expected to hold more capital to buffer any ‘unexpected losses’, be more ‘prudential’ in their management of risk so that these systemically important companies don’t cause a chain reaction of collapses. BUT at the same time they will also be expected to work out a ‘living will’, AKA a plan for how to shut them down in a way that would prevent a chain reaction of contagion
when - sorry - if, they ever did go bust.
Of course the idea of living wills was dreamt up by our fearless regulators in order to make safe the G-SIFI Banks. In my opnion the Living Will idea is a fatuous creation of the intellectually flatulent – Otherwise known as Congress and Parliament.
The first such Wills were delivered to the FDIC who promptly said – “Err, even we can see these won’t work”. And indeed the plans left out so much essential detail that they amount to a D-Day battle plan which says, “We will land on the beach and then win.” The battle plan analogy isn’t just for cheap comedy. The very name ‘Living Will’ is, I think, misleading. Calling them ‘Wills’ is designed to make it seem that resolution of a bloated and unstable bank can be made neat and safe, cut and dried; a series of postumous wishes to be quietly carried out. No such thing will ever happen. You only need read the over all US/UK bank resolution strategy to see it won’t happen.
Instead of calling them nice orderly, ‘living wills’ it would be more more accurate and honest to call them, ‘battle plans’. That would at least convey the truth, that like any battle plan it will be a nice bit of paper you stuff in your pocket whilest you stumble and run through a landmine strewn fog of confusion and mayhem.
But back to the insurers. Since we now know which of them are considered so big that they must not be allowed to fail, perhaps it would be good to see how safe they already are. After all they are the people who are supposed to be so prudent and safe that when disaster does strike, they will be the ones who will defnitely survive so they can be there to help us recover. That is, after all, what we pay them for.
Sadly, if that were true we wouldn’t be needing to discuss living wills for them would we? As it turns out insurers, while not perhaps as wired for disaster as the TBTF banks, are not safe. The Insurers have in fact been rather busy buying some of the risk which previously made the banks collapse. The trade is often called Regulatory capital relief. It is a way of selling the risk associated with an asset, but keeping the asset iteslf. In this case the banks keep their risky assets but get someone else to take on the risk of the asset blowing up.
Who has been keen to buy such risk? Hedge funds and Insurers. I wrote about how it works and who is involved some time ago in, “Where has all the risk gone?”
The thing to keep in mind about the Hedge funds, is that when they buy bank risk they are doing so in order to sell it on to others as an investment. They are not the end investor. So who is? The Insurers.
This is a quote from an FT article from 2011.
Axa Investment Managers has launched a closed-end fund that will provide junior protection on banks’ loan portfolios. The investment arm of the French insurance group has already raised €80m and is aiming to increase that to €150m by January next year. Axa has previously done deals with some of Europe’s biggest banks.
Alexandre Martin-Min, AXA’s head of structured credit investment, said: “There’s a need for capital for the banks and an incentive for them to do these kind of trades.
“For Axa, it gives us access to a wider universe of investment-grade debt.”
You might notice AXA is one of the too Big to Fail, or Globally Systemically Important Insurers (G-SII).
The interest in this risk trade has only been growing. In 2012, Risk.net reported,
Hedge fund enables insurers to capitalise on bank deleveraging
Hedge fund manager Tenax Capital has raised €250 million (£197 million) from insurers in a fund that invests in corporate bonds and loans that banks are seeking to offload.
And that €250 million has already been snapped up by European insurers. Yet it is just a relatively small sum, you might think, in the grand scheme of the billions we have become used to. But then again, from the same article,
The International Monetary Fund (IMF) predicts that de-leveraging by European banks could see their balance sheets shrink by as much as $2.6 trillion (£1.6 trillion). This could result in €1 trillion of corporate debt coming to market, Tenax estimates.
As the article explains, the insurers want to diversify away from sovereign debt, which they have a great deal of, and stocking up on a bit of bank risk would pay them well. Just so long, obviously, as the risks never actually materialize and turn in to a financial losses.
So we seem to have a brisk trade in Insurers buying bank risk. Oh wonderful.
A trillion in risky assets, the risk from which the banks would love to sell on to an insurer who feels they can ‘manage’ the risk of a loss better than the banks. And the big insurers like AXA, who are the G-SIIs will be among the big buyers. Which means if they did, heaven forefend, get it a tiny bit wrong and blow themselves up – being a G-SII (Too Big to Fail Insurer-style) means we would have to bail them out in the next crunch. Sounds just fine.
Of course Insurers are big and buying bank risk is still more a marginal indicator of where they are headed, and the kind of risks they are flirting with, rather than the core of their prudent business. Which as the article I quoted above mentions, has been very much tied to sovergeign debt – which as we all know is risk weighted at zero…..?!
Yes, that’s right. That was my reaction too. So I had a little look at how exposed insurers are to some of the riskier European sovereign debt and …it’s not great.
It is one thing for an insurer to say , we are prudent, we invest in sovereign debt which pays us very little but is safe, when that sovereign debt is German. But Insurers have been playing the same game as the banks. That is, buying up sovereign debt which is risky – from countries which are in trouble and have to pay a good coupon/interest rate on their debt – but because it is ‘sovereign’ debt, is still classed by the regulators as 100% safe and therefore risk weighted zero.
The figures are from a study entitled Impact of the Eurozone debt crisis on Insurer solvency 2011. So they are slightly out of date (2011), but they’re still broadly accurate so far as I am aware.
According to the study,
Although the rating agencies suggest that the insurance sector may feel only marginal impacts associated with orderly defaults of Greece, Ireland and Portugal, the risks associated with Spanish and Italian defaults are significantly greater and their consequences more unpredictable. Exposure to vulnerable assets and the possibility of contagion is certainly a key concern.
So it is Spain and Italy’s health and the insurers exposure to their debt we should look at.
So how is Spain doing? Well unemployment in Spain is near 28% and expected to rise. 12% of those unemployed have been so for more than a year. 16% of of households now have no wage earner. The length and depth of the recession mean unemployment is now digging down to effect even those better educated 30-50 year olds who are the most likely to have a mortgage. In other words delinqencies are still going to rise.
Which is especially bad news for Bankia, Spains fourth largest bank but its largest holder of property assets at €38 billion. Bankia was formed in 2010 by sewing together parts from the the corpses of 7 dead or dying Caja. The re-animated monster breathed only re-expire a few months after first groaning to life, requiring a transfusion of €19 billion. This lasted it a few years but then it needed billions more and had to be re-bailed, but this time by trying to sell shares to the private sector. No insitution would buy. So the government – members of the Spanish 5%- told ordinary Spaniards the shares it was offering in Bankia were a perfect and safe investment. Those who listened have now lost 99% of their money. Bankia shares are worth little more than half of one euro a piece.
Italy? Well officially unemployment is a mere 12%. Though among the young it is 28%. So hope is in the air in Italy. Industrial production has shrunk every month for 15 consecutive months and is 25% lower than it was in 2008! Italy’s debt to GDP which the Trioka uses to estimate how much austerity will need to be enforced, is around 130%. And the economy is forecast to shrink at 1.8% next year. On top of which there is an almighty mess at Banca Monte dei Paschi di Siena over its use of derivatives as a way to hide its real financial state which went horribly wrong. Only an idiot would assume this is an isolated case. I think it is very likely there are many other institutions in Italy, both private and public, feeding tumors of similar origin. They have just not yet erupted.
So are any of the newly annointed G-SIIs exposed to the actual risks inherent in Italian or Spanish Debt and if so how badly? Here are the insurers most exposed to Italian and Spanish debt. As you’ll see some of them also happen to be G-SIIs. The figures are from page 8 of the 2011 Willis report on Insurer solvency.
Allianz – also a G-SII
23% of its total sovereign debt holdings is in the PIIGS – which we are now encouraged to call GIIPS. 90% if which is concentrated in Italian and Spanish debt. This amounts to 70% of the total shareholder equity (which means it total assets minus total liabilities, or what its worth to its owners. The figures are gross not net, which would be lower – see the original chart – , BUT I think gross gives you a better indication of real risk, unless, that is, you believe in the netting out fantasy, which I do not) So a default or re-structuring, even a big bail out, of Italy in particular, would cause a 7 point earthquake at Alliance HQ in Munich. And this doesn’t take in to account that Allianz also owns PIMCO the worlds largest bond manager .
AXA - also a G-SII
16% of its sovereign debt is in GIIPS. Over 60% of which is Italian and over 30% Spanish. Which amounts to 65.9% of Total Shareholder Equity. Very simialr to Allianz. AXA is a French conglomerate.
Now it gets serious -
Generali - alkso a G-SII
44.7% of its sovereign debt holdings are in GIIPS. Of which about 90% is Italian and 5% Spanish. Amounting to 354.5% of Share Holder Equity – or three times all the money they have from their share holders. A re-structuring of any kind, any write down at all and …poof! No more Generali. No more pensions. Generali is Italian. In 2010 it was the second largest insurer in Europe. Only AXA was/is larger. Mediobanca owns 13% of Generali. So if Generali were to have a seizure, it would be a matter of minutes before Mediobanca followed.
Did not provide figures for its total sovereign exposure nor therefore the percentage of that exposue accounted for in GIIPS. But the value of those GIIP bonds as a percentage of Share Holder Value is provided as 304.2% gross, 69% net. Groupama is French. It is far smaller than AXA, Allinaz or Generali but is one of the largest mutual insurers in the world.
Mapfre is similar in size to Groupama. A collosal and suicidal 75% of its sovereign bond holdings are GIIPS. Of which the bulk is Spanish. In 2011 it was 130% of share holder equity. It is the leading insurance company in Spain.
19% of its sovereign holdings were in GIIPS. 50/50 Spain and Italy. Coming to a mere 37% 0f shareholder equity.
So if I’m right and insurers would be among the fires to be ignited in another credit/bad debt blow out, we now have a first few place names on our map of contagion.
We have a list of 9 G-SII insurers considered too big to be allowed to fail. Of them three appear on our other list of insurers disasterously exposed to Spanish and Italian debt to a degree that it threatens their solvency. Put them together, as we have, and you can see where the fires will appear and who you will be required to bail out teh next time we have a debt/credit blow out.
Of course these TBTF insurers just like the TBTF banks will be required to write ‘living wills’. But like the banks the Insurers’ wills will be a long while coming and they won’t work.
On the list of badly exposed Insurers, Generali and Mapfre are the real dangers simply because they are so hideously exposed. Mapfre is not a G-SII but is still too big for its own nation to bail out. So it may not be on the TBTF list but it will still be bailed. Generali is a G-SII and is therefore not only a ticking time bomb for Italy but for all of us, which means the ECB or some other EU ogre would be called on. Whether they could do it in time is another matter. And whether the German tax payer would agree to pay up to save Spanish and Italian pensions is another again. How do you spell ETHNIC TENSION?
So what does this really tell us? Well, now we know some of the people who ‘will be damned’ if they are going to let the people of Italy or Spain ever chose to restructure. Those companies alone will decide FOR the Spanish and Italian people that austerity is the ONLY choice for them.
You might think no people would chose to let their own pension companies go bust. But who says the only way to protect pensioners and their pensions is to first bail out an insolvent gambling company?
Just as we need banks but not necessarily the failed ones we are being forced to bail out, so the same is true of pensions and pension companies.
Just as with the banks, once an insuramnce company is declared too big to Fail it can then gamble more recklessly than before because it knows it will be saved from its own actions if necessary. Of course regulations will be there ‘to stop excessive risk taking’ – but we can already see risks are easy to accumulate as long as you can convince some stupid regualtor to call a risk, not risky.
I am not saying this will happen. I am saying it is there waiting to happen. And thus it forms part of what our leaders are shackling us to. The list of Globally Systemically Important Banks and now Insurers is a measure of how much of our democratic control of both the Market and the State has been taken from us. The number of institutions from your country on the lists is a direct measure of how much control over vital financial decisions is no longer in your hands or even subject to the rule of law.
Sound over the top? Consider the sudden appearance of ‘technocratic governments’ in place of democratic ones. Consider that MarioDraghi, once of the Bank of Italy and Goldman now of the ECB, is mired in allegations of corruption and mis-management from his time at the Bank of Italy when the mess and possible fraud at Banca Monte dei Paschi di Siena was being incubated and was known about. Will any of the allegations reach him, even if proved beyond doubt? I strongly suspect not. The order of the day is stability comes above the law. If the experts in charge broke the laws or need to again, that is what will be done. Much like paying tax, obeying the law is being increasingly seen by the elite as a voluntary option for them and only really to be applied rigarously to us. They are tools of control now.
I think this point is being made very clearly in Spain. Even the BBC has noticed. A BBC headline reads,
The EU’s curious silence over Spain’s Rajoy
Mr Rajoy is Prime Minister of Spain. He believes in and enforces the austerity programme required by the Troika. But as the BBC reports, Mr Rajoy is also,
…facing serious allegations of corruption. The former treasurer of his party alleges that they ran a slush fund fed by illegal donations from construction companies. Some of that money, he says, was passed to Mr Rajoy and other party leaders. He has testified that 25,000 euros (£21,500; $33,000) was handed to Mr Rajoy as recently as 2010.
The article goes on,
The treasurer, Luis Barcenas,.. has provided a detailed record of these transactions which have been published.
These and a host of other squalid allegations with seemingly very strong evidence to back them up – strong enough to get you or I suspended if not in custody – are piling at Mr Rajoy’s door. Yet, as the BBC notes,
Mr Rajoy has dismissed the allegations and seems irritated that questions are being asked. He has repeatedly said he will not stand down. To date he has seen no need to provide a detailed explanation.
And why should he, he is Too Big To Question. No European leader has said a word – The BBC ‘s curious silence. They don’t care that he is in all likelihood a criminal, because he is one of them doing their work – making sure things remain ‘stable’ so that the wealth and power of the top 5% is maintained. You and I obey the laws, they do not. They are a self assembling super elite for whom laws are a laughable formality.
They are above the law, and they are deciding who else, which senior executive positions in which global businesses are likewise above the laws, all laws .
Welcome to your future.