(2008 Nov blog post)
INTRODUCTION to a letter --- to the editor
In response to the U.S. economic 'meltdown' that surfaced in no uncertain terms in mid-September 2008 --- as evidenced by a $700 billion goverment 'bailout/rescue', I fired off a set of Letters to the Editor of a local newspaper.
(This was after sending off a set of letters to members of the Senate Banking Committee -- the contents of which are posted in other 'economy' blog posts on this site.)
The newspaper was being deluged with letters, so it was almost impossible to get a letter published --- even if the letter were good enough to be approved for publication.
A letter to this newspaper has a very limited potential audience anyway, if only published in their paper editon and not on their web site.
Even if published on their web site, a letter is likely to have a very short life on their website.
So, to feel like I was getting some heavy-weight frustrations off of my chest in a more effective way, I decided to post my letter in this blog --- because this web page might get a few more views than the newspaper or its web site.
The thought of improving the visibility of the letter's message made it seem like the weight-of-frustration was getting a better lift off of my chest.
The letter (email) in brief
The main point of this letter is that the House Republicans are proposing to use 'private insurance' to bail out the huge U.S. financial institutions that put the world in this mess.
Apparently, the House Republicans are trying to avoid having the federal government (in other words, the taxpayers) perform the bailout.
That is a noble aim. But it suffers from a fatal flaw. Namely:
What private insurance company (or companies) are going to take that risk?? A 100% risk.
And what private insurance company (or companies) have enough cash on hand (or credit) to do the bailout??
Unfortunately, the House Republicans seem to believe there is a 'Santa Claus Insurance Company' that will grant them their wishes.
The House Republicans seem to be mentally challenged --- to put it nicely.
It seems rather hypocritical of the House-Republians to be dead set against requiring private health insurance companies to insure pre-existing conditions --- and yet they are now proposing to use private economic insurance companies to bailout the pre-existing condition known as the 2007-2008 Great Recession.
In other words, the House-Republicans are asking these private insurance companies to take on a 100-percent-risk condition --- a pre-existing economic condition (a huge number of bad mortgages --- and bad credit-card debt --- and bad student-loans --- and bad auto-loans).
30 Sep 2008
Dear Editor, Daily Press:
The House Republicans are proposing a 'free market' insurance plan to perform the proposed 'Economic Stabilization', in place of the taxpayers-buy-the-flawed-assets plan.
If it is really to be a 'free market' plan, then they should find 'free market' insurance companies to provide the insurance --- not the government, whose meddling they continually complain about.
Let's look around and see (1) what 'free market' insurance companies might provide the insurance --- and (2) what kind of premiums they would want to charge (to cover the risk involved).
The $700 billion estimate by Henry 'Hank' Paulson et. al., for purchase of the 'toxic' assets is probably similar to the estimate that a private insurer would guess would be the 'nominal' value of the assets to be insured for the troubled institutions ---
especially the big, new depositor-plus-investment-banks --- such as
But who knows --- the risk (bailout required) could be much higher. A private insurance company would need something more specific to work with.
By the way, the Republicans --- and some conservative Democrats --- managed, in 1999, to repeal the Glass-Steagall Act of 1933 , which was implemented during the Great Depression to help avoid depositor institutions bailing out speculators --- and thus avoid depositors being exposed to the very real possiblity of having their deposits wiped out by speculators.
Any one with common sense should be worried about the picture developing in the past week or so.
Toward a specific bailout amount :
I just heard on the news last night that one of these biggie savings-bank-plus-investment-bank combos may still have 'toxic assets' on the order of $32 billion. This gives a 'private' insurance company something to work with to determine a premium for that congolomerate.
The insurance company would probably have to guess that there was a good chance that at least 20% of that $32 billion would be unrecoverable debt. Hence the insurance company might have to pony-up about $6 to 7 billion when the debt went bad, which is probably real soon, within a year or two.
So the insurance company would probably set the premiums pretty high, since the risk is pretty high --- and very immediate. So the insurance company would have to set the premium to a rate of at least $3 to 4 billion per year.
Of course, they would have to throw in a factor of 2 (like many bidders on construction projects do) to take into account Murphy's law (stuff happens). Plus, this rough calculation of the amount needed to cover the risk was based on a quite optimistic view of the amount of unrecoverable debt --- that 20% unrecoverable may be more like 40% --- or even 80%.
So the private insurer is likely going to have to ask for $8 billion --- or even $16 billion --- in the first year, for premium payments --- and maybe all of that up front as a 'down payment'.
Now, I ask you, House Republicans, do you really think any of these big, new savings+investments banks will find it feasible to make an $8 billion (or $16 billion) premium payment to 'your' private insurer(s). Even $4 billion.
For comparison, one of these savings+investment companies just yesterday (29sep2008) sold 21% of their company to Mitsubishi for a $9 billion infusion of cash.
Do you think they will WANT to spend that amount on an insurance premium? Do you think they CAN spend that amount?
And we are just talking about a $32 billion 'toxic-assets' example out of what may be about $700 billion in 'toxic-assets'.
The total amount of premiums needed by the House-Republicans' private-insurers may be about 20 times more than that $8 billion premium estimate --- about $160 billion in premiums needed from the 'too big to fail' instituations in the first year.
1) There is probably no 'free market' insurance company/companies that can (or will) step forward to insure the amount of 'toxic' debt out there.
2) If we taxpayers insure the 'toxic' debt out there, we should demand a premium of about $10 billion in the first year, for every $30 billion in 'toxic' debt insured.
I would love to hear rebuttals from House Republicans, like Eric Cantor R-VA, who favors a "free market" (hah!) insurance plan to cover the 'toxic' debt. I would especially like to hear what 'free market' insurance companies he had in mind. Surely not Taxpayers Inc.
Basically, he is asking for insurance for a 'pre-existing condition', which no private insurance company would insure.
Or think of it as demanding hurricane insurance, AFTER the hurricane has hit.
Can you think of any insurance company that would provide hurricane insurance in that case?
At least, the insurance company would have a pretty clear idea of the damage that was done.
Because of the still-existent lack of "transparency" (=truth), we still do not know the economic damage 'out there'.
Just say NO, to the House-Republican 'private insurance bailout' plan --- unless House Republicans can come up with private insurers.
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Page was posted 2008 Nov 03.