Metlife Inc Says See You in Court, Uncle Sam!

Metlife Inc (MET) Says See You in Court, Uncle Sam!

Photo Credit: thecrazysquirrel

Before I start tonight, I just wanted to mention that I was on South Korean radio a few days ago, on the main English-speaking station, talking about Helicopter Money. If you want listen to it or download it as a podcast, you can get it here. It’s a little less than 11 minutes long.

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The bravery of Steve Kandarian and the executives at Metlife Inc  is a testimony to something I have grown to believe. Frequently the government acts without a significant legal basis, and bullies companies into compliance. If a company is willing to spend the resources, often the government will lose, when the laws are unduly vague or even wrongheaded.

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This was true also in a number of the allegations made by Eliot Spitzer. Lots of parties gave in because the press was negative, but those that fought him generally won. Another tough-minded man, Maurice Raymond “Hank” Greenberg pushed back and won. So did some others that were unfairly charged.

MetLife won its case against the Financial Stability Oversight Council [FSOC] in US District Court. The government will likely appeal the case, but though I have been a bit of a lone voice here, I continue to believe that Metlife Inc  will prevail. Here’s my quick summary as to why:

  • The FSOC’s case largely relies on the false idea that being big is enough to be a systemic risk.
  • Systemic risk is a mix of liquidity of liabilities, illiquidity of assets, credit risk, leverage, contagion, and lack of diversity of profit sources.
  • Liquidity of liabilities is the most important factor — in order to get a “run on the bank” there has to be a call on cash. Life insurers have long liability structures, and it is very difficult for there to be a run. People would have to forfeit a lot of value to run.
  • Contrast that with banks that use repo markets, and have short liability structures (w/deposit insurance, which is a help). Add in margining at the investment banks…
  • The only life insurers that suffered “runs” in the last 30 years wrote lots of short-term GICs. No one does that anymore.
  • Life insurers invest a lot of their money in relatively liquid corporates, and lesser amounts in illiquid mortgages. Banks are the reverse.
  • Leverage at life insurers is typically lower than that of banks.
  • Insurers make money off of non-financial factors like mortality & morbidity. Banks run a monoculture of purely financial risk. (Okay, increasingly many of them make money off of “free” checking, and then kill their sloppy depositors who overdraw their accounts… as I said to one of my kids, “Hey, your best friend “XXX bank” sent you a love note thanking you for the generous gift you gave them.”)
  • That makes contagion risk larger for banks than life insurers — banks often have more investments across the financial sector than insurers do.
  • Life insurers tend to be simpler institutions than banks. There is less too-clever-for-your-own-good risk.
  • State regulators are less co-opted than Federal regulators. They also employ actuaries to analyze actuaries. (At least the better and larger states do.)
  • Finally, life insurers do more strenuous tests of solvency and risk. They test solvency for decades, not years. They have actuaries who are bound by an ethics code — the quants at the banks have no such codes, and no responsibility to the regulators. The actuaries with regulatory responsibility serve two masters, and though I had my doubts when the appointed actuary statutes came into being, it has worked well. The problems of the early ’90s did not recur. The insurance industry generally eschewed non-senior RMBS, CMBS and ABS in the mid-2000s, while the banks loved the yieldy illiquid beasties, and lost as a result.

Anyway, that’s my summary case. I haven’t always been a fan of the industry that I was raised in, but the life insurers learned from their past errors, and as a result, made it through the financial crisis very well, unlike the banks.

PS — there are some things I worry about at life insurers, like LTC and secondary guarantees, but I doubt the FSOC could figure out how big those are as an issue. A few companies are affected, and I’m not invested in them. Also, those risks aren’t systemic.

Full disclosure: long ENH NWLI BRK/B GTS RGA AIZ KCLI and MET

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.