Warren Buffet, Bernanke, The Fed, and conflicing interests

[WhiskeyGirl]

Warren Buffett was on TV today talking about the markets, the Federal Reserve and Bernanke.  He seemed to think Bernanke had to be reaffirmed.  Why?

How much of the volume is due to anonymous DARK POOLS and HIGH FREQUENCY TRADING?  Who’s doing all the buying and selling?  Lowering the volume?  MYSTERY transactions?  Anonymous players?

Warren has a financial interest in Goldman Sachs, and I recall that he said somewhere that “Goldman Sachs was always special.”.

I think a good audit of the Federal Reserve, would ease many taxpayers minds about what goes on there.  How many deals does the Federal Reserve have going? 

What’s in the Fed’s portfolio?  Derivatives?  Reinsurance? 

I think a good robust audit and opening of the books is long overdue at the Federal Reserve.  Why shouldn’t taxpayers know HOW and WHY they make record profits?  Why is the DOLLAR falling in value?  How low do they plan for it to go? 

How much inflation?  How many years can Americans expect their money to remain worthless?

Why can’t taxpayers know who they’re making deals with? 

Why doesn’t the Federal Reserve press the RESET button and find a highly intelligent person, and a good FRESH team, to unwind the problems with this institution?

WARREN Buffett deserves his reputation as a wise and thoughtful investor, but one issue has kept coming back to haunt him over the past decade -- major malpractice in 2000 and 2001 by General Re, a reinsurance company that Buffett's Berkshire Hathaway group has owned and managed since late 1998.

Just last week Gen Re, as it is called, agreed to pay $US31.7 million ($35m) to settle charges brought by the US Securities and Exchange Commission for its role in fraudulent accounting practices in 2000 and 2001 at insurers American International Group and Prudential Financial.

…

The $US31.7m payout was part of a $US92m settlement paid by Gen Re, including $US60.5m to settle a civil action on behalf of AIG's shareholders.

So is Buffett a villain? In typically frank style he told the Fox Business Network late last week: "We did something wrong and we paid the price.

"It shouldn't have been done, and there's nothing inappropriate about the fine we paid."

That's a very good start but it's worth discussing what Gen Re actually did…

An SEC regional director explained that Gen Re arranged to sell financial products or "sham reinsurance transactions" to AIG and Prudential in 2000 and 2001 "for the sole purpose of enabling those companies to manipulate their accounting results and mislead investors"

The SEC had previously obtained a settlement from AIG of more than $US800m for what it called securities fraud and improper accounting, reaching separate agreements with former AIG chairman Maurice Greenberg and former chief financial officer Howard Smith.

It shouldn't happen any more, but back in the late 1990s financial reinsurance was a very canny system dreamed up by reinsurance companies, of which Berkshire Hathaway has at least two, whereby they would rent their balance sheets to cash-strapped insurers for a nice big risk-free fee.

The wondrous element of it for the reinsurer was that it didn't do much at all except offer to pay money to the insurer in certain circumstances, supplying a nicely written policy to that effect, while alongside the deal there was usually a side letter, invisible to all but the most eagle-eyed auditor, saying no claim would actually be made on the reinsurance policy.

It was a disguised loan, but the beauty of it for the borrower was that it could be recorded in their accounts as a reinsurance recovery. On the other side, the lender got a fee and claimed a tax deduction.

…

More here – http://www.theaustralian.com.au/business/opinion/general-re-reinsurance-scandal-still-haunts-buffett/story-e6frg9if-1225823053772

How many of these ‘reinsurance’ type deals exist?  How many with little clauses?

Sham transactions?  What kind of paper trail did the sham transacts have?  Post-it notes?  Phone calls?  Emails?  Any review?  Internal controls?  Ethnics training? 

Who’s looking out for shareholders?

What kind of reports did they issue for all these reinsurance deals?  How many auditors have enough experience to find these little side letters of interest?  What did the deals look like in the annual reports?  Mini-footnotes?  Maybe the Federal Reserve audited these financials like they do for AIG?

Maybe most of those auditors were right out of college?  Little or no experience under their belts?  (Much like the 500 IRS auditors/accountants Obama recently hired?  No experience?)

Is this what the reinsurance section of the Healthcare Reform bill is for?  If companies are already funding the VEBA’s, why do they need reinsurance?

Is something hiding in the dark recesses and file cabinets at the Federal Reserve?

How many conflicting interests does Buffett have?  The Federal Reserve?  Treasury?  Goldman Sachs?

jmho

[WhiskeyGirl]

General Re agreed to pay $60.5 million in restitution to investors and acknowledged its role in the fraud.  It will also pay $12.2 million to settle charges by the U.S. Securities and Exchange Commission in connection with the fraud and for helping Prudential Financial Inc. falsify reported financial results.

Several former General Re executives have already been convicted  of charges that in 2000 and 2001 they helped AIG improperly inflate its reserves by $500 million.

http://www.foxbusiness.com/story/markets/industries/finance/general-settles-aig-case-justice-department/

2000 & 2001, from the Clinton era? 

What was done between 2001 and 2008 to ensure that there was no more funny business? Derivatives?  Credit default swaps with Goldman and others?

How much did Goldman and Berkshire know about what was going on at AIG?  The financial problems?  Accounting?

[WhiskeyGirl]

OK...head spinning 

On Monday, Swiss Re announced that it had struck a “retrocession” agreement valued at around $1.3 billion with Berkshire Hathaway, the conglomerate controlled by Buffett, who had a net worth of $40 billion when we published our list of the 400 wealthiest Americans in September.

The development is a sign of Buffett’s growing involvement with the recession-battered reinsurance firm, which early last year offered Berkshire Hathaway a large block of convertible bonds after Buffett agreed to inject $2.6 billion in cash. Upon conversion, those bonds could give Berkshire as much as a quarter of Swiss Re’s shares.

In a retrocession deal, one reinsurance company helps another company limit its losses and unlock much-needed cash by taking over policies that the latter had underwritten with the understanding that those policies may be worth more over time. The terms cited in the company’s press release have Swiss Re receiving a $1.3 billion lump sum or “ceding commission” as part of an arrangement that will help it reap the immediate value of a swath of life reinsurance business written prior to 2004.

What is the definition of “retrocession”?

The purchase of reinsurance by a reinsurance company. This limits the risk that a reinsurance company must face, since it has purchased insurance against an event that might affect a company that it had underwritten.  If a reinsurance company continues to purchase insurance it might unknowingly buy back its own risk, known as "spiraling".

Who’s life insurance policies is Berkshire reinsuring?

My question?  Who is Swiss Re reinsuring?  Underwriting?  AIG?

Investopedia explains Retrocession

1. When one reinsurance company has other reinsurance companies partially underwrite some of its reinsurance risk, it essentially diversifies its risk portfolio and limits its potential losses as a result of a catastrophe. For example, if a hurricane causes widespread damage to businesses, homes, automobiles and lives, a single insurer could face bankruptcy without retrocession.

2. The best known international act of retrocession is when Hong Kong was given back to the Chinese from the British in 1997.

3. Hedge funds often buy very valuable single assets and divide them on a pro-rata basis amongst partnership unitholders. Just as risk and liabilities can be retroceded, so can assets.

Sounds like a derivative or credit default swap.

http://www.investorwords.com/6645/retrocession.html

In recent years, Buffett has taken several large stakes in blue chip companies that have stumbled amid the recession.  He plowed $5 billion into Goldman Sachs in September 2008 and $3 billion into General Electric a week later. Since then, Goldman shares have rallied 30% while GE shares have fallen 35%.

http://blogs.forbes.com/billions/2010/01/19/buffett-shores-up-swiss-re/

 

[WhiskeyGirl]

MAIN FACTS:

- Under the terms of the contract Swiss Re will, on a 100% quota share basis, reinsure a closed block of yearly renewable term individual life reinsurance business, written prior to 2004, with Berkshire Hathaway Life Insurance Company of Nebraska.

- The transaction is effective 1 October 2009 and will be reported by Swiss Re in the first quarter 2010. Swiss Re will receive a ceding commission in the region of CHF1.3 billion and will release CHF300 million of capital to support the business. Swiss Re will continue to provide administration and reporting services for the subject business.
…
- "This is a significant step forward in Swiss Re's strategy to increase capital efficiency. By transferring this block of life business, Swiss Re is monetising intangible assets and freeing up capital. The transaction puts us in an excellent position to redeploy the capital at more attractive returns," said Christian Mumenthaler, Swiss Re's Head of life and health.

“monetizing intangible assets” – sounds like I’m not sure.  Derivatives?  (I may read too much about these derivatives and cds.)

What is the intangible asset?  ‘Risk’?

http://money.cnn.com/news/newsfeeds/articles/djf500/201001180137DOWJONESDJONLINE000022_FORTUNE5.htm

Did they do a good job of underwriting/rating this “closed block of yearly renewable term individual life reinsurance business, written prior to 2004”?

What exactly are the ‘intangible assets’?

Head spinning and ready to blow up with all this financial wheeling and dealing…

Berkshire/Buffett is getting back it's own (or related business) insurance risk? 


Berkshire Berkshire Hathaway Life Insurance Company of Nebraska ===> Swiss Re. ===> Berkshire Hathaway Inc.


How is that block of business performing?  Good claims experience?  Bad claims experience?  Healthy happy people insured?  Or, substandard risks?

   

 

[WhiskeyGirl]

I found some interesting references to "zero premium" and Berkshire.

Is that "zero premium" life insurance?  Sold to some based on income, not on health history?

Or, "zero premium" as in stock price?  Book price?

An interesting puzzle for tomorrow.

I wonder who the target market was for those life insurance policies being reinsured?

If it was based on income, are the policies being cancelled?  Lapsing? 

[WhiskeyGirl]

Zero Premium Life Insurance Explained –

Is Zero Premium Life Insurance A Scam or a Slam?
By Marilyn Katz 

Zero premium life insurance is meant to be marketed to seniors, probably between 65 and 85 years old. It is a permanant life insurance product, probably universal life, with a face value of $50,000. Investors will pay the premiums in return for a signed agreement from the insured. The agreement will specify that upon the insured's death, the investors will get $35,000 of the death benefit, but give the insured's beneficiaries $15,000.

So, essentially, the insured person would have a free final expense product, with enough face value to pay for a funeral and settle debts. Final expense insurance is a hot market for seniors, who become concerned about leaving their spouses or children with the cost of an expensive funeral. The senior citizen may also want to leave their spouse or children some money to settle debts, pay off a car, etc.

However, strangers on the street do not have an insurable interest. It is illegal to gamble on people's lives, or to have an interest in a person's death! Of course it is. As attractive as free life insurance may seem, the value is offset by the ethical and legal problems with the product.

read more here – http://ezinearticles.com/?Is-Zero-Premium-Life-Insurance-A-Scam-or-a-Slam?&id=587624