|A compilation of this board's financial/economic posts From 40606 to 40620
|Post 40606 by Decomposed OT: Table ON TOPIC SUMMARY Aug|
Post 40607 by ttalknet2 Reply
Our nation of contradictions...
Free trade, except for steel.
(enter your exception here ___________ )
Clean environment... except for Kyoto.
Accountability... except for atrocity courts.
Israel must show restraint; just ignore US attacks on (your favorite country here).
Consititutional protection... except for John Ashcroft.
The economy is strong... except for all the bad stuff.
Social Security will survive... forget that it's an unfunded liability.
Baseball is the American sport... except for greed.
So we continue to p+ss off everyone on the planet. That's our policy now, whether domestic or foreign. We're big, we're bad, and we dare anyone to knock the chip off our shoulder. No more Mister NiceGuy. Join us, stand aside, or be crushed/invaded.
be afraid. be very afraid.
PS. We invaded Haiti before. I think we'll do it again pretty soon. The US should control its own hemisphere before launching new adventures in the Middle East. Sheesh. That seems so simple. But Haiti needs help, yet our attentions are focused on military solutions 10,000 miles away. Hey, it's still the economy, stupid! Heck, it's the banks, stupid. And it's the politics, stupid. And our local hemisphere is still going into the toilet. No matter. We're doing a good job of p+ssing off the planet while ignoring our own systemic flaws. But it's still the US way or the highway, bub! "Diplomacy" is no longer in our vocabulary. So wake up and toe the line, you nitwits!
Anyone for another invasion of Grenada? Cuba this time?
Post 40608 by maniati Reply
ljpit: The most popular finance text in business schools is probably "Principles of Corporate Finance," by RIchard Brealey and Stewart Meyers.
The Small Business Administration (under the U.S. Dept. of Commerce) has various publications, as well as a web site at www.sba.gov.
There are a few different companies that publish a series of legal outlines, used by law school students, which summarize black-letter law. They publish outlines on many different topics. You could take a look at a legal outline for "Corporate Income Tax." The more popular series are written by "Gilbert's" and "LegalLines." The IRS might have something, but I'm not sure.
Finding GAAP rules on the web has always struck me as a real chore, so if you make any headway there, please let us all know! But FASB publishes a book on GAAP, and there are other books out there, such as those by Wiley, and others, that provide analysis and interpretation.
OT: JUDGE DB! What's in a name
Post 40610 by edde Reply
From Friday's Globe
stock broker Mark
Valentine has been
arrested in Germany
after a two-year FBI
sting operation into
stock fraud and money
code named Bermuda
Short, has resulted in
charges against Mr.
Valentine and dozens
of others, including
former Vancouver lawyer and financial consultant Martin Chambers and five
other Canadian residents.
FBI officials in Miami said Mr. Valentine was arrested on Wednesday at the
Frankfurt airport under a provisional warrant, and remains in German
custody. FBI spokeswoman Judy Orihuela said officials intend to seek his
extradition to the United States.
"We want him extradited," Ms. Orihuela said. "We wouldn't go to the
trouble of arresting him if we didn't want him back here."
Late Thursday, an RCMP spokeswoman also confirmed that the RCMP in
Toronto have arrested two people in connection with the complex fraud
case, but said no details including the names of those arrested could
be released because the matter is covered by a publication ban.
Details of the investigation were unveiled Thursday by a coalition of law
enforcement agencies including the Federal Bureau of Investigation, the
RCMP, the U.S. Securities and Exchange Commission, the U.S. Postal
Inspection Service and the National Association of Securities Dealers.
In announcing the charges, Marcos Daniel Jimenez, U.S. Attorney for the
Southern District of Florida, said the case demonstrates the need to act
against corrupt corporate directors and securities brokers who violate their
duties and "take unfair advantage of the market and the public so as to
illegally enrich themselves."
The 58 individuals charged include executives of public companies,
stockbrokers, stock promoters and controlling shareholders of public
The FBI said its undercover probe involved two separate sting operations.
In one, involving 20 separate indictments, the FBI created a fictitious foreign
mutual fund and had an agent pose as a corrupt securities trader working for
the fund company. He approached business executives and stockbrokers
and proposed a scheme in which he would be able to get his fund company
to purchase large blocks of stock at prices significantly above market rates,
making huge profits for the executives who participated. In return, the
undercover agent asked for secret kickbacks of proceeds from the sales.
The illegal kickbacks were to amount to several million dollars in each case,
and were to be paid to offshore corporate bank accounts. The FBI said the
cases were handled in a way that caused no actual loss to investors, but said
they involved $200-million (U.S.) in attempted fraudulent stock sales.
The other schemes saw an FBI and an RCMP agent pose as members of a
Colombian drug cartel seeking to launder proceeds from cocaine sales. In
total, corporate executives and financial professionals agreed to launder
$1.4-million in funds. The FBI said the money was represented as the first
part of a long business relationship that would eventually involve many
Mr. Valentine, former chairman of Toronto brokerage firm Thomson
Kernaghan & Co., was charged along with Paul Lemmon, the founder and
managing director of Voyager Group Ltd., a Bermuda-based financial
services company. They are charged with conspiracy to commit wire, mail
and securities fraud.
The case against the men involves three companies in which Mr. Valentine is
alleged to have owned and controlled a majority of the shares: C-Me-Run
Inc., SoftQuad Software Ltd. and JagNotes.com Inc. All three traded on
the U.S. over-the-counter market at the time of the alleged frauds.
The FBI alleges that Mr. Lemmon and Mr. Valentine conspired to sell stock
in the three companies for a total of $29.4-million in return for paying a
secret kickback of $7.8-million to the phony mutual fund trader and his
other phony accomplices within the fund company.
The indictment also alleges that Mr. Lemmon and Mr. Valentine were to
cause securities brokers to receive kickbacks in return for helping to
manipulate the market price of the three companies by selling their stock to
Mr. Valentine's Toronto lawyer, Joseph Groia, said Thursday he had read
the U.S. indictment but would not comment on his client's arrest, nor
whether he will oppose extradition. He said Mr. Valentine is hiring a U.S.
lawyer to handle the charges, and said he could not comment on any of the
"At the moment, all we have is very sketchy information, and it's just way
too early for anyone to respond," Mr. Groia said.
Mr. Valentine was one of the richest players on Bay Street during the
Internet stock boom, and was hired at the then-thriving firm in 1994 at the
age of 24. He quickly climbed to the top, and reshaped the firm as a
specialized technology brokerage and investment banker.
He has been prominent in the news this spring and summer because he is
under investigation by the Ontario Securities Commission for matters relating
to his work at Thomson Kernaghan. The OSC said Mr. Valentine had
created "a culture of conflict and non-compliance" at Thomson Kernaghan
through a variety of investments and financings. He was suspended by the
brokerage firm, which is in the process of winding down and going out of
Meanwhile Thursday, the FBI and RCMP also named six British Columbia
men in other charges related to their Bermuda Short sting.
Les Price of Vancouver is charged with conspiracy to commit wire fraud,
10 counts of wire fraud, two counts of securities fraud and one count of
money laundering. At the time, he was chief executive officer and a major
shareholder of Medinah Minerals Inc.
The indictment alleges he agreed to pay a $1.5-million kickback in return for
inducing the fake mutual fund to pay $5-million for five million shares of his
company. He is also accused of conspiring to artificially inflate the market
price of Medinah by making illegal payments to brokers who would sell
shares to unwitting clients.
In another case, John Purdy and Ronaldo Horvat of Vancouver, and Harold
Jolliffe of Duncan, B.C., and Calgary, are charged with one count of
conspiracy to launder money and eight counts of money laundering. They
were principals of Bolivian Hardwood Corp.
Kevan Garner of Vancouver and Mr. Purdy are charged with one count of
conspiracy to launder money and two counts of substantive money
laundering. The indictment says the two men were stock promoters and
principals of Vancouver-based firms Garner Purdy Venture Capital and
Diacom Ventures Inc.
They are accused of laundering funds purported to be the proceeds from the
sale of cocaine. The maximum penalty for the charges is 20 years.
Public documents list Mr. Garner as the former director or shareholder of
numerous publicly traded companies. This week, a news release announced
his appointment as director and CEO of Vancouver-based Whistler Inc.,
which has said it is developing a range of fuel cell products including a
fuel-cell-powered golf cart.
Mr. Garner is also charged along with Martin Chambers of Vancouver in
another case involving the same phony Colombian cocaine cartel. Mr.
Chambers is charged with conspiracy to launder money and with money
laundering. Mr. Chambers was arrested by FBI officials last week while
trying to board a flight in St. Louis.
The indictment seeks the forfeiture of all personal property involved in the
money laundering, including a Royal Bank account under the name of
Mystar Holdings Ltd., which is controlled by Mr. Chambers.
Mr. Chambers, 63, has a long history of legal problems. In 1981, he was
charged with conspiracy to import cocaine to Vancouver from Miami. A
decade later he and Vancouver financier Paul Deyong were involved in
buying and selling large quantities of cigarettes though A.H. Riise Ship
More recently, he was described in court documents as the controlling mind
behind six real-estate projects that borrowed nearly $27-million from
investors in Eron Mortgage Corp., which had its licence frozen in 1997 by
the B.C. Securities Commission.
Criminal charges were laid against Brian Slobodian and Frank Biller, the
two principal officers of Eron, after thousands of mainly elderly investors lost
(Voluntary Disclosure: Position- No Position)
Post 40611 by pmcw Reply
Derivatives - A Story of 2+2=10
My Uncle Bill died nearly 30 years ago. Since, I've lost all my aunts and uncles. Bill was a great guy; gentle as a soft snow and always ready with a smile. I still miss him.
Nice was intuitive for Bill, but thinking about things mechanical was not. Some are blessed with an extra dose of one thing and often they seem to be cheated of the regular dose of another. Bill was scared to death of electricity. There was no particular reason other than maybe the occasional story that made the news of someone getting electrocuted in a home accident.
Many people have some fear of electricity and most would say their's is what we commonly call a "healthy fear". This is usually defined as drawing the line wherever one feels the safe side will keep them alive. However, for Bill, the safe side included not touching an extension cord even if it was clearly visible neither side was connected. A cord just laying coiled on the floor with both ends visible left him panicked.
Of course, there was no good reason for this fear other than Bill knowing electricity can kill. However, he couldn't comprehend that once a cord was unplugged from the wall that it ceased to carry voltage and current. He just knew for sure that if it was in that cord once it could remain in the cord forever. Irrational, you could say that since you know it not to be the case, but if you didn't know a unplugged cord was safe and only that electricity could kill, maybe just a "healthy fear".
In the years that Bill grew up, the 1920's and 1930's, electricity was much more of a mystery than it is today. Few had any idea what the word really meant, they just knew to be careful and that if a switch was toggled, a bulb would light. Today, young children manipulate digital bits that are actually small DC charges. I'm pretty sure Bill wouldn't have liked the thought of operating a keyboard, connected by a cord to a box that is then plugged into the wall. But, then again, who knows; he did like to play solitaire.
Today, even though words such as electricity have lost most of their mystery, there are other words that stop people dead in their tracks just as the coiled extension cord did Bill. One of these words is "Derivative". Let's take a look at some common definitions:
Derivative is a very broad term. It was once most commonly used in linguistics to describe a word that was "derived" from another or in chemistry to describe a chemical that was derived from another. However, beyond these general definitions, there are several that deal directly with math that are more specific.
1) The limiting value of the ratio of the change in a function to the corresponding change in its independent variable.
2) The instantaneous rate of change of a function with respect to its variable.
3) The slope of the tangent line to the graph of a function at a given point. Also called differential coefficient, fluxion.
Investors commonly use a more general definition for derivatives:
A financial instrument whose characteristics and value depend upon the characteristics and value of an underlying instrument or asset, typically a commodity, bond, equity or currency. Examples are futures and options.
Clear as mud, huh? That is exactly the problem. Any loosely defined word can have, as Yoda would say, a light side and a dark side. Derivatives can easily be used to hedge or add security to a position. A hedged position is one where an investors takes steps to limit downside risk and, in doing so, trades off some of their upside potential. Hmmm, in this situation, derivatives sound like they add safety rather than danger, don't they?
A farmer might also use derivatives to hedge his risk of a steep drop in the prices of his crop. He could sell short, he could sell calls, he could buy puts or even use some combination of the mechanisms depending on his goals and situation. These would all be considered derivatives.
Of course, speculators in a particular field could also sell naked shorts (if the price goes up they are exposed to infinite losses), the could buy wide eyed calls that could easily expire worthless if prices don't rocket upwards, they could sell naked calls that they would have to cover at a loss if prices do rocket upwards. They could also sell puts and get stuck with high priced stuff if the bottom of what they "put" drops from view. Or, of course, they could "wind up" a wild derivative package made from a hundred combinations of these and many other derivative strategies.
The point here is that there are very conservative ways to use derivatives to reduce risk just as there are some really stupid ways to use them that radically increase exposure. Since derivatives are inherently leveraged (take a small amount of money to control a significantly larger stake) there are ways to add up their "implied value" to where the total number would scare anyone. Due to this, some taking heads and, more commonly, writers with a goal to persuade, will use their best math skills to wind up a derivative number so large it would have to scare any thinking investor and then use this scary number to convince readers the coiled cord we all know is actually free of electricity could kill them at any moment. These folks are, for the most part, no less slimy than the Internet analysts would swore Yahoo was going to $1,000 per share.
The choice is up to you. If the word "derivative" simply strikes fear you need to spend some time learning about how they are used. More often than not, those on Table that have the greatest knowledge of derivatives seem to have the least fear of their existence. However, those who most often only know how to spell the word seem to want to warn us all of our pending derivative driven doom. Personally, I'm absolutely confident there have been both very good and very bad deals done using derivatives - this is simply the nature of the game.
Due to this, I would like to issue a challenge to all who wish to post on Table. If you want to post a story about our pending doom that is driven about derivatives, gold shorting or a currency crisis, explain, in your own words, exactly who has done what, who will do what and how the mess you forecast will "unwind". Or, at least don't post a story that you can't explain in detail without such a disclaimer. If you can't do that, simply let the derivative cord sit on the ground untouched, your fear is no more logical than my Uncle Bill's.
PS: spirare, please quit spamming us about CALVF. I know your spam is subtle, but it's still spam. The irony of your spam is that you want to use fundamental macro-economic logic to justify Gold, but ignore the micro-economics of CALVF. Anyone who takes ten minutes to look at CALVF can easily see they have absolutely terrible fundamentals. Due to this, anyone who really want's to take a serious position in gold mining would quickly look at other potential candidates. If you don't realize this you need to learn about fundamentals and Table is a good place to start. If you do realize this and continue to post, well, what can I say - you're despicable.
Post 40612 by maldinero Reply
U.S. to the rescue
While this commentary is based on a very limited premise, (IMO, there were many more contributing elements to the boom) I think the conclusion is fairly sound.
The FED is almost out of dry powder, because it denied the existence of inflation until the bubble was out of control. In hindsight, it would have been smarter to keep the market under reins and encourage a healthier savings/debt ratio across the board. malidnero
This week is the 20th anniversary of the start of most powerful bull market the United States has ever known. It actually ended only in 2000, after 17 years.
What happened in 1982 that generated the boom?
Simple: Mexico went broke.
More specifically, Mexico announced that it couldn't or wouldn't continue servicing its foreign debt. How that came about is a fascinating tale by its own right, but let's stay with the result, not the causes of the crisis.
On the one hand, Latin America entered a long period almost a decade of economic, financial and social crisis, characterized by austerity and a tremendous loss of potential growth and, also, the ultimate downfall of dictators/authoritarian regimes throughout the continent.
On the other hand, the South American crisis generated a boom in the States, with the West following tamely. How? To understand, let's look at the economic underpinnings of America in August 1982.
The key tool: Short-term interest
From the Yom Kippur war in 1973, the U.S. suffered from high inflation, low growth and frequent recessions. In October 1979, President Jimmy Carter appointed Paul Volcker to chair the Federal Reserve, and gave him the mission of conquering inflation, which had climbed to 12% or 13% a year high enough to undermine the pillars of the U.S. economy.
Volcker acted using the key tool available to central banks: short-term interest rates, the right tool to handle monetary problems such as inflation. He raised the rates again and again and again. At its peak, the short-term rate rose to all-but-inconceivable levels nearing 20%. Long-term rates followed suit, until long-term bonds could be had bearing annual yields of 12% and more!
Naturally, Volcker's aggressive moves choked the economy and the stock market. Carter lost the 1980 election, but Volcker kept his nose to the grindstone under Ronald Reagan. Even when Volcker gradually began to reduce the rates in 1981, the economy barely budged from the 1980 slump it fell into a "double dip". Stocks eroded, interest barely twitched, and turnovers were low.
Then Mexico defaulted, which if coupled with collapsing regimes around it could have destroyed America's banks, which were the biggest lenders to Latin America. Volcker showed grit: reversing his policy, he sharply lowered the rates, significantly stepping up the pace of rate cuts and thus streaming vast amounts of money to the marketplace.
One of the first places the flood of money washed over was the stock market, which turned buoyant. The journey started at 766 points, quickly passed the record high of 1,050 points, and by 1984 had surged onto 2,000 points.
Looking back, nobody dreamed that the underlying trend would be sustained for so long, especially given the 1987 crash and the Gulf War of the early 1990s. Finally the Dow Jones reached 11,700 points meaning, it had reached a level 15 times its size in 17 years.
Anyway, after the liquidity injection into the financial body, the monetary expansion of 1982 coupled with Reagan's massive tax cuts extracted the economy from recession and jumpstarted the boom. And if the 1980s were much better than the 1970s, well, they were still nothing compared with the giddy times of the 1990s.
South America: Big basket, big case
Meanwhile, changes swept through South America. One crisis followed another, but the improvements in the region's economies, societies and politics were marked. That was the conventional wisdom, at least. Mexico led the pack: following its free-trade agreement with the U.S. and Canada NAFTA, it was effectively annexed to the U.S. economy. Since its great breakdown of 1994, Mexico has been morphing from another Latin American country into a North American one.
But South America is South America. Governmental corruption reigns in its democracies just as it had in its autocracies. Foreign investment was still needed for growth, but as soon as fears arose that a currency, a nation or its government were turning unstable, the capital would up and flee.
The innovation this year is that the money-men of Washington tried to implement an aggressive policy, under which they announced that they wouldn't rescue nations collapsing under the weight of their inefficiency and corruption. Argentina was the test case for the new policy and proved that yes, an entire country can be economically, financially and perhaps socially wiped out.
But, just as Fed decided when Turkey sank into its latest crisis, that it simply had to be saved it applied the same logic to Brazil. It is simply too big to be allowed to collapse, to borrow a phrase from banking. From Washington's perspective, Argentina is one thing, Brazil another: it would badly burn the U.S. banks, and that could not be allowed to happen.
Which brings us to the big difference between now and 1982. Tax cuts and rapid rate cuts can't be made because they already have been, last year, after the September 11 terrorism attacks, and beforehand because of the sinking prices on the stock market. It was also done in 1998 after Russia's collapse and the implosion of that ill-fated hedge fund, Long-Term Capital Management. And it was done the year before, upon the South-East Asian calamity.
The U.S. government of 2002 is out of economic ammo to save foreign nations and its own banks. Even lowering the rates by 50 or 75 base points couldnt create the effects of previous rescue missions. Nor would a tax cut, as the deficit balloons, restore the world's confidence quite the contrary, perhaps.
Therefore, although the scenario sounds familiar, and a new generation of players seems to be acting out the same tired old roles there is no guarantee that we're about to see the same old movie.
OT: Maybe Uncle Bill had a run
Post 40614 by pmcw Reply
U.S. Bans a Scheme to Avoid Estate Tax
By DAVID CAY JOHNSTON
The Treasury Department banned a technique yesterday that thousands of the wealthiest Americans have used to escape billions of dollars in gift and estate taxes. The technique involves buying expensive life insurance that will be passed on to heirs, but declaring a far lower price on gift-tax returns.
The department said the technique was not valid and never had been, leading experts on taxes and insurance to predict that people who have bought these policies will be drawn into years of litigation with the government and with their advisers.
The technique, described in an article in The New York Times last month, "is not permitted in any published guidance," the Treasury Department and the Internal Revenue Service said in a formal notice. Before now, the technique's creators said it was legal under a 1996 I.R.S. ruling.
Pamela F. Olson, the chief tax policy official at the Treasury Department, said that under the regulations issued yesterday, "any scheme to understate the value of benefits for income or gift-tax purposes won't be respected" in audits.
Several tax experts said her remarks made it clear that the government was going beyond shutting down the specific technique described in The Times and was declaring that all tax avoidance techniques that rely on using two different insurance rates are invalid.
Critics of the technique said it effectively disguised a gift to heirs that should be taxed like any other gift. The new technique sidestepped gift taxes in a two-step process that was designed to put wealth into a trust for children or grandchildren and then to wrap the wealth inside an insurance policy so that when the insured person died, the money would pass without gift, estate or income taxes.
First, someone buys insurance for one price, say $550,000, that could have been purchased for as little as $50,000. Only the lower figure is reported for gift-tax purposes, in this case lowering the tax due for wealthy people to $25,000 from $275,000.
Then, in the second step, this gift- tax obligation is shifted to a spouse. Because there is never a tax on gifts between spouses, the $25,000 tax vanishes.
The insurer invests the difference between the highest premium and the lowest premium. That investment grows tax free, paying for future premiums on the policy. At death, the entire face value of the policy is paid tax free to heirs.
Wealthy Americans, including a Rockefeller, paid first-year premiums of as much as $40 million for the policies. Each dollar spent on the premiums could typically eliminate the equivalent of $9 in taxes.
An I.R.S. official said last month that he had not been aware that so many people were exploiting the loophole.
But with yesterday's announcement, "I think Treasury has made it clear that they will not countenance games," said Stephan Leimberg, chairman of Leimberg Information Services in Bryn Mawr, Pa., which provides commentaries that help tax lawyers, accountants and financial planning consultants understand tax policy.
"I think a lot of people will be in deep yogurt," Mr. Leimberg said, predicting years of audits and litigation for those who bought the policies, as well as for their tax advisers.
An estate tax lawyer who had been critical of the technique, Sanford J. Schlesinger of the Kaye Scholer firm in New York, said the notice seemed to rule out all tax avoidance techniques based on using two different insurance premiums, one that is actually paid and another that is declared for tax purposes.
"Those who bought these policies will be embroiled for years in litigation," he said, with the I.R.S., with their lawyers and with the insurance agents who sold them the policies. He and others said it was less likely that the insurance companies that sold the policies, primarily New York Life and Massachusetts Mutual Life Insurance, would be drawn into the litigation.
Treasury officials declined to detail their strategy for making those who used the techniques pay the taxes and interest they did not pay. "We will treat this like we treat other situations where we find taxpayers taking incorrect positions on their tax returns," said Tara Bradshaw, a Treasury spokeswoman. "We plan to enforce the law and administer it appropriately."
The techniques were devised seven years ago by a prominent New York estate tax lawyer and a former chemical engineer who now sells insurance.
The lawyer, Jonathan G. Blattmachr of Milbank, Tweed, Hadley & McCloy, is known for his skill at devising techniques to reduce or eliminate gift, estate and income taxes for wealthy people.
Mr. Blattmachr was on an airplane last night and his cellphone connection was disrupted before he could comment. In an e-mail message received last night, he declined to comment.
The other developer of the technique, Michael Brown of Spectrum Consulting in Irvine, Calif., was on vacation and did not respond to calls to his office.
The technique grew out of a ruling that Mr. Blattmachr obtained from the I.R.S. in 1996 allowing a form of tax avoidance called "family reverse split-dollar" life insurance. But critics argued that his technique went far beyond the intent of the ruling. The Treasury, which oversees the I.R.S., effectively endorsed that view yesterday.
The Treasury acted after a copy of the Times article was sent to Ms. Olson by Representative Lloyd Doggett, a Texas Democrat who has for years introduced bills to close tax shelters and loopholes. Yesterday Mr. Doggett said: "I am encouraged that this particular tax shelter has been shut down, but for every narrow loophole that is closed, there are dozens if not hundreds more tax shelter schemes that remain available to be exploited by those who choose not to pay their fair share for necessities like national security."
Several lawyers said it was significant that the Treasury notice did not describe the device as a tax shelter. If it were held to be a tax shelter then Mr. Blattmachr and others would be required to turn over lists of clients who used the techniques.
Donald C. Alexander, a Washington tax lawyer and former I.R.S. commissioner, said, "The tax shelter law doesn't apply to gift and estate taxes," only to income taxes. "I think the Capitol Hill people are already thinking about remedying that."
Post 40615 by Arkural Reply
Nyse Plans To Postpone Opening Bell On Sept.11
"...delay its opening till 11 a.m..."
Post 40617 by lkorrow Reply
Insurance Company Issues
Insurers Feel Cumulative Impact Sept. 11, Accounting Scandals
By HENNY SENDER and CHRISTOPHER OSTER
Staff Reporters of THE WALL STREET JOURNAL
". . . But here is the upshot: Earnings for many insurance concerns are likely to be disappointing in coming quarters, ratings agencies are likely to downgrade the financial strength of large numbers of these companies, and some insurers may need capital injections.
"We expect one in three life-insurance-company ratings will be downgraded by the end of the third quarter," says Mr. Buckley of Fitch.
Certainly, some losses have been posted and some companies have been candid about more disappointments on the way. MetLife Inc. has warned of lower investment returns for the third and the fourth quarters as a result of the drop in the stock market and has told investors to expect net investment losses of $100 million to $150 million for each period. Yet stocks are less than 1% of MetLife's $174.6 billion investment portfolio. For the second quarter, the company took a write-down of $215 million on WorldCom Inc. bonds alone, leading to $260 million of realized losses on a pretax basis, though realized gains helped reduce the net investment loss to $117 million. . . ."
My thought on MET's projected 3Q/4Q investment losses is that the projections are similar to losses already realized 2Q, so the impact on earnings should be negligible. Perhaps the industry woes expressed in the story could result in a "flight to quality" from weaker players. MET reported 5% top line growth over the last 6 months, while PRU experienced decreased revenues less than 1%. Still, I think industry woes could boost both companies sales, because they are financially strong.
Full story (requires subscription):
OT: Decomposed-re OT Summary.
ot: Outel, srudek,
ot: RB Policies