January 30, 2009

The Defibrillator is on the WRONG patient

Why Obama’s Advisors Need Triage Training

By: Dr. David E. Martin, Executive Chairman, M∙CAM Inc. and Fellow at the Batten Institute of the Darden Graduate School of Business Administration, University of Virginia


The government bailout of AIG failed to attract the notice that it deserved for good reason. Few economists and fewer informed citizens have any clue about the complex role the insurance industry plays in the global financial scene. This lack of visibility may cost tax payers in excess of the combined Obama Administration stimulus plan plus the carelessly constructed TARP legacy of the Bush Administration. Why? The answer is quite simple. Every pension fund in the United States, most corporate bonds and debt, and a huge amount of commercial product and service flow relies on its credit rating and performance insured by little understood credit guarantees. Take these guarantees away or impair the companies that issue them and no retirement account in the U.S. could maintain its codified obligations for investment grade assets. And, by the way, if rating agencies in the U.S. actually rated risk inclusive of the balance sheet risks of these guarantors, we would already have a rating crisis equal to, or larger than Japan’s 10 year ratings draught.

The International Credit Insurance & Surety Association or ICISA may have painted the happiest industry consensus growth statement of any industry association in the past 3 quarters when, in their November 18, 2008 press release they stated, “By insuring payment risks and guaranteeing the performance of third parties we support our policyholders in maintaining and growing their business.” For an organization whose membership carries over US$2 trillion in exposure, this was certainly a cheery message. This press release came on the same day that Market Watch reported Hartford Financial Services Group, Genworth Financial Inc. and Lincoln National applying for capital support from the Office of Thrift Supervision begging the question, if the risk performance professionals can’t manage their own risk, what are they actually selling to their clients?

A review of ICISA members’ balance sheets and 4th quarter earnings reports reveals a more troubling observation – one that has missed all but the subtlest of media attention. The Chairman of one member stated in his interim report to shareholders the fall of 2008, “The crisis on international capital markets intensified in the third quarter on a previously undreamt-of scale.” Investment income was halved and earnings in some members fell by over 90%.

FDIC Chairwoman Shelia Bair – head of a distressed insurer in its own right – has been promoting the “bad bank toxic asset purchase” solution for good reason. If the FDIC actually had to do what insurers are contracted and paid to do (yes, the FDIC is paid premiums to manage risk), the financial crisis would be seen in its full glory and that would be calamitous at best. Get the paddles where they belong Mr. President and Secretary Geithner. The manikin never was alive and the patient is dying!