Monday, August 23, 2010

Insurance, insurance, insurance...the scam of our age

Many economic realities have been masked by the illusion of safety and protection...we need health insurance, life insurance, portfolio insurance, credit insurance, pet insurance, municipal bond insurance, liability insurance, default insurance, insurance on life insurance, market insurance, derived insurance, money market insurance, FDIC insurance, insurance on insurance (reinsurance), options on securities, options on derivatives of securities and we need it all to somehow lower the cost and risk of anything that we are considering doing or procuring.

The reality of life is that there are no free exchanges and as Warren Buffett demonstrated with his testimony regarding the ratings agencies, ratings insurance is not free either. Moody's is a schlock outfit with the intelligence of a worm or its got motivations of a snake and the ethics of an ant. If Buffett is willing to scam us with ratings and make excuses for it, what about all the other insurances he is involved with? How about all those "put" insurance contracts he wrote on the SP500 and other indexes? Are they a scam or viable? Can he actually deliver on them and does the money exist?

What about all the insurance that banks are promoting? It was just a few years ago that Lehman Brothers and almost every other investment bank was offering risk free portfolios. As it went: 'We will guarantee that you will get "X" return above "Y" and you can't lose more than "Z" on your investment'...funny how they all ended at ZERO! Most of those portfolios collapsed during the crash in 2008 and the covenants were breached. I am aware of quite a few Europeans who wanted 100% sure things who got 100% sure things - losses!

The idea of evading risk while targeting gains is the quintessential reason that people invest in hedge-funds...but isn't this a play on leverage made viable by others forms of insurance? "Why not trade leveraged short and long or better yet trade derivatives and arb anything we can get out hands on". The words "into a disaster" are the conveniently missing from that equation. But that would ruin the marketing wouldn't it.

The problem in this world is that so many people want something to be something that its not. If you are a male looking for a girl, a transvestite or mannequin should not make a viable proxy...but in the current version of reality, we are willing to entertain any proxy as long as its, accepted, popular or "doctrine". 

If we can further obfuscate a situation by insuring against any unwanted side effects, we can get rid of the problem entirely. The issue with this, is that most risk is not realistically insurable, it just transforms into another risk, usually a worse one...and in reality its cheaper not to insure and instead plan and manage appropriately. The funny thing about "risk" is that it becomes contagious in both directions. One more dangerous than the other.

Insurance is scam of both Wall Street and of Washington. Medicare, Obamacare, Social Security, FDIC, FHA, FHLN, FRE, FNM and the Fed are all examples of failed confidence games/insurance scams that end up ripping off investors and taxpayers and similarly the clients of their plans. The fact is, that when we get so sophisticated that we have to insure and we can obfuscate everything...the activity has almost always been the mask of massive fraud for hundreds of years...but these frauds have always ended the same way...the losers who issue the plans get massive bonuses and the people who buy them get ripped off when they blow up...and someone else get the bill.

There is no such thing as free lunch, yet we as a society these days, are always looking for a free one...we try to pretend that there is a way that someone else can be responsible for OUR problems. That argument does not hold water and I am personally tired of it.

Nearly every-time we take on some credit or leverage, we buy, are required to buy or need to rationalize the risk by buying some sort of insurance. So, how this seems to work, is that whenever we commit to pay some interest on something, we need to pay more interest to someone else. That's a lot of interest and its parasitic when all is said and done. Ironically, it has made us more vulnerable rather than secure. That did not work with AIG, MBIA or Ambac and CDO and other structured products without exceptional efforts by government. Will it work with Goldman Tax and JP Morgan now that these companies essentially buying and selling insurance? Don't bet on it. The feeling of being safe, while it may be nice, is artificial and fosters complacency rather than solid/proactive business decisions and does not offer a foundation on which success can be built!

No serious and productive person relies on someone else to bail them out when they do not produce, nor should they expect someone else to produce for them... it is an organic process. Living and succeeding are based on balance...not ignorance or obfuscation. Things do not get better when you ignore them...nor do they get better when you pretend they are something else. What we have been doing as a society is pretending that money as, illusion, doctrine or debt is ok. That government lies are ok, insurance as a proxy for solvency is ok and that money is real when someone is willing to insure it.

This is why the financial system is not just a place to win or lose...its a representation of the values of society as a whole. Those values are very compromised. They are unrealistic and inappropriate. They are endorsed by the president and his henchmen, but that will not make them successful...and therein lies the problem. At some point "crap" smells like "crap", looks like "crap" and finally when the secret sauce is gone... it is "crap" and can not be called anything else.

Most massive collpases in history have been related to the idea that somehow we can insure against them and somehow use alchemy to turn something worthless (or worse) into "gold". It has never worked, and now, in my opinion, the insurance parasite and the financial ponzi scheme that is built on it is trying to play its trump card...insunace.

Ironically, insurance is the most expensive ever at a time when it can be least afforded...and this applies to most products...including the ridiculous Obamacare venture. The only products for which insurance is affordable, are the ones the Fed is protecting...(remember  Maiden Lane assets (I mean liabilities)) owned by it or the banks that are on the "favorite list".

The jig is up, derivatives will lose leverage,  insurance will lose relevance, and with the collapse in leverage, the money supply will contract way further than the 40% contraction it has made over the last year. Asset values will have to adjust to real values that are not representations of viability due to insurance backing them or credit available to purchase them.

Its a sad story...but insurance is a parasite and creates huge opportunities for malfeasance while contributing little to negative value to society at best. Ironically, banks as regulated by the fed, and the central banks themselves are not storehouses of our money or value, but they are manipulators of insurance trying to use legal camouflage to sell us something we don't need.
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