Chris Sposato comments on issues related to reinsurance.
I have been following an interesting discussion about Catastrophe Bonds recently. Apparently Allstate and others entered into cat bond arrangements in which Lehman Brothers not only structured the interest rate or total return swap but also structured and sold the underlying sub-prime assets. This is interesting reading and I invite your comments and analysis.
Please see:
If you have some additional information or thoughts, let us know. Thank you.
Like many, I have been watching the development and progress of the US Stimulus Bill- its tough being politicians writhing around in the pig sty; and as outsiders we’re tired of listening to the porcine cries which are way too loud. . . .
While we watch the spectacle of representatives and senators designing laws, cajoling agreement with, and working toward passage of the “stimulus plan” we need to be mindful of how we came to find ourselves in this predicament. People who could not afford to buy homes were sold houses by charlatan brokers collecting fees for themselves as they wrote mortgages on behalf of banks who earned other fees but didn’t take on any credit risk because these loans were then bundled and sold as high yield investments to purchasers who didn’t understand the underlying risks they bought; and those who packaged and sold these securities – the wall street bankers – didn’t think they had to understand the credit risks either nor had to bother to investigate any underlying credit reports. . . . .
At the same time, these same investment bankers were making odds on the presumptive defaults of sound (and unsound) corporations worldwide and were selling discounted bets at the craps table as to whether those companies might default. For a cost or premium of a few basis points you could bet on the financial collapse of any significant (or insignificant) company – and then pray for its demise.
And on top of all of that, let us clearly identify the real issue that has caused the foregoing problems to turn from “burning’ serious economic issues into nuclear bombs . . .
Mark to Market accounting was the accelerant tossed onto the fire to turn these incendiary situations into nuclear meltdowns in the financial landscape The so called brain-trust promulgating generally accepted accounting principles who have insisted that valuations of assets must be determined instantaneously have created a nuclear storm for real value over time. We know the value of many of those subprime properties value will come back to normal and the corporations against which credit default swaps were sold will recover The failure to view values over time – as opposed to instantaneously – has proved to be a sick and poisonous potient for the worldwide economy.
I’m not an economist nor an accountant, but I can say with confidence that the accounting rules of mark to market need to go as they contributed far too much to the devastation experienced recently by the US and also foreign banks. They do not reflect the reality of the real world and only create turmoil and confusion in their profession’s own synthetic view of the world. These rules have only served to be an accelerant thrown on the fire of bad situations. Things go bad, throw more gas/kerosene on the fire!!! Let it burn. Let it burn hot and have higher flames. Let it burn.
Shakespeare used to say (and I paraphrase): the first thing to do is to kill all the lawyers …….
Today, perhaps, one should say: banish those accountants who promulgated mark to market rules!
