Unsatisfied with its previous efforts to punish those of modest means and reward the biggest failures in the history of business, the government has created a public-private investment plan (PPIP) to get the job done. The PPIP calls for some of the world's largest investors – PIMCO, BlackRock, and the like – to buy mortgage-backed assets from troubled banks and sell them to individual investors through mutual funds, a transfer of risk from incompetent bankers to hapless, helpless taxpayers.
In a Bloomberg article, BlackRock executive Steve Baffico claims the PPIP is "giving the guy on Main Street an equal seat at the table next to the big guys." Somehow I doubt "the guy on Main Street" earns huge management fees regardless of the funds' performance, and I know he does not now, nor will he ever, have the government standing by to back up his purchases.
If there's one guy who gets screwed the worst by all the government bailouts, it's the guy on Main Street. If Americans weren't such a bunch of Obama-worshipping sissies, they'd start revolting against all the politicians who steal their wealth for a living.
But I don't expect Americans to rise up against their increasingly oppressive government anytime soon. They don't want less government. They want more. The latest Rasmussen Reports national telephone survey indicated only 53% of American adults believe capitalism is better than socialism. So... 47% of American adults – almost half – think less freedom is better than more freedom, and believe punishing success and rewarding failure is better than the converse.
The electorate is an ignorant, jealous mob that's getting more and more of exactly what it wants – your money. Democracy is working. The Amerikan people have spoken, and they want your money. And even if they can't get it, they're happy as long as you don't get to keep it.
I warned everyone about municipal bonds last December at the annual Alliance meeting in Hong Kong. Now, Moody's has assigned a negative outlook to every local government in the U.S., due to plunging tax revenue and investment losses. Moody's didn't report on any specific municipalities, but its report offers the same warning I gave last December to any investors holding municipal bonds: Be careful. A New York Times article states:
The report suggested conflicts ahead between taxpayers struggling to keep their own households afloat and elected officials charged with balancing budgets, making their payrolls and protecting their credit ratings.
"Taxpayers, worried about their own financial condition, are more resistant than ever to increasing property or other local taxes," the report observed.
Two days after the New York Times article, the Wall Street Journal published a story saying at least 10 states (Arizona, Connecticut, Delaware, Illinois, Massachusetts, Minnesota, New Jersey, Oregon, Washington, and Wisconsin) are considering both sales and income tax hikes. Of course, that's in addition to the massive hikes already in effect in California and New York.
Now that's a franchise. The government has endless pricing power and an unassailable monopoly with no chance of antitrust lawsuits.
Yesterday, the government announced it would expand bailout efforts to include insurance companies, earmarking some of the $130 billion in remaining TARP funds to boost confidence in the sector. It's true the government has already rescued AIG, the largest recipient of government funds to date, which is an insurance company. But AIG's losses stemmed from the sale of credit-default swaps, not its life insurance operations.
The decision to bail out insurers makes sense. Millions of Americans depend on these companies to protect their families in times of crisis... and if they decide to cash in their policies, it could cause a "run on the bank" situation, wiping out the insurers. Also, insurance companies use their collected premiums to invest in the stock and bond markets. If they were forced to sell in order to shore up capital, it would be disastrous for the market.
So far, the government has only put one condition on an insurer's eligibility... It must own a federally chartered bank in order to apply for money. The Treasury announced that condition last year, but hadn't officially decided to dole out the cash at that point. In order to qualify for government funds, several insurers – including Hartford Financial, Genworth Financial, and Lincoln National – bought banks last fall. Hartford, Lincoln National, and Prudential have already applied for TARP funds. MetLife, the biggest publicly traded insurer by assets, owned a bank before the crisis struck, but has not said whether it has applied for TARP money.
I think there are two considerations with a potential Treasury bailout of the life insurers: the reality and the perception.
The reality is that the government can't possibly bail out 18% of the corporate bond market, the entire stock market, and a big chunk of the commercial real estate sector, not even if it spent 100% of the remaining $130 billion of TARP money on life insurers, which is highly unlikely.
According to a recent report by Bridgewater Associates, between ratings downgrades and actual losses, the 13 largest publicly traded U.S. life insurance companies would need about another $400 billion just to stay afloat. But what if that's not enough? Everything the government has spent so far hasn't been enough to fix anything. The government can't prevent losses from happening by systematically rewarding failure and punishing success, any more than the Financial Accounting Standards Board can prevent losses by changing accounting rules. Losses must be taken. If the current marks were classified as other than temporary, it would obliterate 150% of the tangible equity of the 13 big life insurers on my Extreme Value victim list.
It's a legitimate question, whether losses will be taken by the insurance companies, their investors, and their clients (which is what ought to happen) or whether they'll be taken by the taxpayers (which would be a real crime). I don't see how the government could put it on the taxpayer without risking hyperinflation. It would have to print trillions, which it has done already to no avail.
How things will unfold is unpredictable. But between the market and the government, I'll bet on the market and against the government.
That's the reality.
Meanwhile, the perception that the government can save insurance companies is whipsawing short sellers and could ruin them if the rally continues in the life insurers. If you followed my advice in Extreme Value, you shouldn't be more than 16% or 17% in the red right now. Some readers might still be showing a profit. I'm betting reality will win out over the mistaken belief that government can save the life insurance industry from itself. I'm staying short... These insurance companies are better shorts than ever. If you would like to read my full report in Extreme Value, click here.
New highs: none.
In today's 'bag, subscribers write in defense of Wild Turkey and socialists... How else have we offended you? Tell us here: feedback@stansberryresearch.com.
"Hunter S Thompson drank [Wild Turkey]. that's who of who's... If you drink Burbon, you will find it at most bars and consequently will be ordered because of that. It's good for the mind and soul." – Paid-up subscriber SL
Ferris comment: Given the diversity of things Dr. Thompson ingested, you'd hardly call his palate "discriminating." That said, I've definitely become a bourbon fan. I like Blanton's, Eagle Rare, Booker's, Knob Creek, and Basil Hayden.
"Ooooohh... I do love to hear the wealthy whine as some of their Welfare programs get reduced. Flee the country? Fine. They've already stashed their money elsewhere, and they aren't giving anything back to America anyway. It's the scrappers, not the blood-sucking fat-cats who create new jobs, and eventually new wealth. All the wealthy do is live off the backs of the rest of us. Good riddance." – Paid-up subscriber James Wood
Ferris comment: You make one and only one valid point. Corporate welfare should be eliminated immediately. Otherwise, you are out to lunch. Wealthy people are no more homogenous a group than women or whites or Welshman or anybody else, so "the wealthy" is an unwarranted generalization. There are wonderful wealthy people and wealthy jerks.
Keep in mind, small businesses employ far more people in the U.S. than big businesses, more than 90% of "scrappers" go bust in the first year, while "fat-cats" – like the Walton family – provide steady employment and benefits for more workers than any private company in the country.
Finally, the notion of banking secrecy to which you allude is a simple-minded myth. If your money is in the banking system anywhere in the world, the U.S. government can get at it. Attempts to hide money from the U.S. government while keeping it in the banking system are just invitations to have them seize even more of your wealth than it already does.
You sound like one of those misguided fools who said they liked socialism better than capitalism.
Regards,
Dan Ferris
Medford, Oregon
April 9, 2009