House-Republican Private-Insurance Plan for the Bailout

A phony cure for a Pre-Existing Economic Condition.

Including a rough calculation of the required premiums.

(Proof that they subscribe to the adage
"You can fool some of the people all of the time
--- and that's sufficient. That'll work.")

(2008 Nov blog post)

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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, via 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 --- much less 4 or 5.

A letter to this newspaper has a very limited potential audience anyway, and a letter published in the newspaper is not readily available for reference --- and has a very short life on their website. So I post my letters in this blog.


START-OF-LETTER :

TO: letters@dailypress.com

SUBJECT: House-Republican Insurance Plan --- for a Pre-Existing Economic Condition

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).

(1)
Well, probably the biggest financial insurer in the business is AIG. Whoops --- they are on the ropes, and they may fall soon. Well, let's leave finding a candidate 'private' insurance company until later.

(2)
Let's consider what the 'free market' insurance company would want for monthly/quarterly/yearly premiums --- say, yearly --- even though the insurance company would want its premium payments more frequently than that --- and probably a big 'up-front' payment.

The $700 billion estimate by 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+investment-banks --- like Bank of America (now, plus Merrill Lynch), JP Morgan (now, plus Bear Stearns and WaMu), Citigroup (now, plus Wachovia), and a couple of other biggies.

But who knows --- it 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. Example: Bank of America (a depositor institution) combining with Merrill Lynch (an stock-market investment institution).]

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. Even $4 billion.

For comparison, one of these 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?

Bottom-line:

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 insurance plan --- unless House Republicans can come up with private insurers.

Cheers,
[my name]
Newport News, VA

END-OF-LETTER.

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Posted 2008 Nov 03.
Changed to allow for better printing 2009 Aug 23.
Changed page format slightly 2013 Apr 24.