The Following Is Entirely MY Opinion...

I’m sitting at my desk today drinking water like a marathon runner- maybe because the past few days have been a marathon of insurance and market news. But, as I’ve said, for real news- and not just opinions or speculation- read Bloomberg- because largely financial blogs are speculation and advice should come from professionals (even though Cramer is and has been wrong many many times- so choose your professionals wisely).


Here is my weekly food for thought:


The election and the bailout. Who’s to blame? Who should we vote for? What does the current financial situation tell us about the US Financial System and what has happened in the past.


The origins of these questions, history major that I was, lies in the very foundations of America. Back in the days of Alexander Hamilton (famous now for the old “Got Milk” commercial), the first US Secretary of the Treasury, there was a big debate as to the beginnings of a UNIFIED American bank. This issue of Individual states rights vs. Federal control harks to the very foundations of our nation, and hits every major issue from Finance, to the abolition of slavery, to women’s rights- and one of the fundamental differences between Republicans and Democrats. The financial industry has long been governed state to state- as Insurance continues to be through various state regulators, but along the way in the past 250 years or so, there was a gradual move in the banking industry towards cross state chartering, national regulation, mergers and acquisitions along the lines of different financial services, establishing financial holding companies and eventually- Deregulation.


Now, where to place the blame. First of all, placing blame in this situation is rather useless in the sense that the damage is done, and now we have to find a way to deal rationally with the fall out. It is also subjective as everyone, in the completely partisan USA would rather blame the “other party”. However, when examining a series of legislation, especially since Clinton’s overhaul of the Financial sector in 1999 (the Financial Services Modernization Act), which heavily deregulated the industry (and brought up to date by today’s congress) and allowed banks to engage in other “financial services” where they previously could not- like Insurance (previously left to the Insurers) or mortgage lending.


Another major problem with the Mortgage crisis is that it is something that was developed in the Government rather than the Finance Industry. Legislation passed during the Carter and Clinton administrations made certain types of sub prime lending illegal- outlawing redlining (also illegal in property insurance- its refusing to lend or insure in certain areas based on demographic information. It speaks to the Adverse Selection risk the finance industry faces, which is a term used to describe the fact that the guy who lives on an earthquake fault line is more likely to want to insure his house than the guy living in an area that’s never had a hurricane, earthquake, flood or tsunami). This opened the industry to an incredibly heightened risk when all of a sudden banks were forced to recognize Unemployment checks as a legitimate source of income.

Now, as an Underwriter, we are paid to exercise our good/professional judgment in assuming risk on behalf of our organization. When Uncle Sam reaches his hand over my desk forcing me to accept clients I know have an increased probability of default. - Something is going to happen.


So who do we blame???