I'm sure there are some of you out there that run your own business, or manage the finances of somebody else's business. What if you had a revolving line of credit with the bank that said your liquid assets (cash and cash-like equivalents) had to be a certain percentage of your outstanding debt. Moreover, lets say the bank had a covenant that stated that the your level of retained earnings had to be a certain percentage of your assets. If business got bad and you started bleeding cash and maybe some of your receivables started going delinquent and maybe the value of your inventory started falling, you think if you went to the bank and said;
"Look, my balance sheet is getting weaker and my cashflow is getting worse. How about you take those cash and capital covenants and loosen them to reflect my current state of affairs? In fact, how about you loosen them to reflect that things are going to get a whole lot worse?
You think the bank would go along with you? Probably not. Now lets look at what the insurance companies like Hartford want to from their regulator. From Bloomberg News;
Jan. 12 (Bloomberg) -- Hartford Financial Services Group Inc. and Prudential Financial Inc. led life insurers lower after regulators dismissed an industry plea to speed capital relief. Hartford fell $2.82, or 16 percent, to $15.34 at 12:01 p.m. in New York Stock Exchange composite trading. Prudential, based in Newark, New Jersey, declined $3.44, or 11 percent, to $28.44.
Life insurers are pushing regulators to grant looser reserve standards after investment losses depleted capital. The National Association of Insurance Commissioners rejected an industry request to approve reform by Jan. 16 and plans to hold a hearing at the end of the month before taking a vote, Susan Voss, the vice president of the group, said late on Jan. 9.
Yes, you read that right. Their capital positions are getting worse so they want the regulator to degrade the standards. You know what is horrifying? A couple of months ago, when things were looking particularly grim for the insurance companies and their structured credit loaded balance sheets, this sector rallied SHARPLY (The Hartford went up something like 150% in one day) on the rumor that the capital standards were going to be eased! The sector didn't rally because they were going to make more money or that their financial conditions were going to improve. Instead they rallied because there was a rumor the regulator was going to lower the bar on safety and soundness. I remember that day and I also remember a certain balding, screaming, sleeve rolled up, investor on CNBC saying that The Hartford was fine, AFTER it rallied about 150% in one day!
What's even more perverse, in my opinion, is that the ratings companies, the same ones who missrated all the bonds the insurers bought when they rented their brains out to the rating companies, now hold a lot of the insurers lives in their hands. According to Bloomberg;
“The continued turmoil in the credit and equity markets is taking a bigger toll on the U.S. life insurance sector,” Standard & Poor’s said today in a statement. “We expect to take negative rating or outlook actions on several life insurers in the next six months.”
Downgrades trigger all kinds of nasty covenants and counterparty collateral agreements. Remember AIG? Maybe the only hope for some of these companies is if their main counterparty is Goldman!
with a great big "booya" for him and a shared bathroom at art's for us!
Posted by: marlene and dave | January 13, 2009 at 01:01 AM
I wonder if CNBC will run some ads on that one saying great their man is!!
Posted by: mike | January 12, 2009 at 03:21 PM