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Economic Scene: Examinations of Health Care Overlook Mergers

June 11, 2013 by Leave a Comment

But when the Federal Trade Commission finally decided to look at the deal, it encountered an entirely different objective: to gain market power.

Mark Neaman, Evanston’s chief executive, had told his board that the deal would “increase our leverage, limited as it might be,” the investigation found, and “help our negotiating posture” with managed care organizations.

The commission caught Ronald Spaeth, the Highland Park C.E.O., talking about the corporation’s three hospitals and explaining how “it would be real tough for any of the Fortune 40 companies in this area whose C.E.O.’s either use this place or that place to walk from Evanston, Highland Park, Glenbrook and 1,700 of their doctors.”

It was a great deal for the hospitals. The fees they charged to insurers soared. One insurer, UniCare, said it had to accept a jump of 7 to 30 percent for its health maintenance organizations and 80 percent for its preferred provider organizations.

Aetna said it swallowed price increases of 45 to 47 percent over a three-year period. “There probably would have been a walkaway point with the two independently,” testified Robert Mendonsa, an Aetna general manager for sales and network contracting. “But with the two together, that was a different conversation.”

And who was left holding the bag? Not the shareholders of UniCare or Aetna. It was the people who bought their policies, who either paid higher premiums directly or whose wages grew more slowly to compensate for the rising cost of their company health plans.

The commission’s unusual investigation of the aftermath of the Evanston-Highland Park deal produced its first successful antitrust case against a hospital merger since 1990, after a string of defeats in court. Highland Park and Evanston were forced to negotiate separately with insurers, rather than as a bundle. Collusion was forbidden.

What was learned from the investigation is more relevant than ever today. It should draw policy makers’ attention to an elephant in the room that appears to have been overlooked in the debate over how to rein in the galloping cost of health care: a lack of competition in what is now America’s biggest business — accounting for almost 18 percent of the nation’s gross domestic product.

Our anguished search for ways to slow runaway health spending has so far mostly focused on how to eliminate waste: Might the fee-for-service system used by health care providers across the nation provide perverse incentives for doctors and hospitals to prescribe costly yet pointless treatments? Are doctors prescribing every possible test to insulate themselves from any conceivable lawsuit?

The Obama administration is betting heavily on waste control to address the problem. It has offered incentives for accountable care organizations, which get a bundled payment to keep a patient in good health rather than charge for individual procedures. It has financed research into comparative effectiveness — hoping to steer patients to the best therapies.

What is missing from the stampede of policy innovation is something to tackle one of the best-known causes of high costs in the book: excessive market concentration.

Two decades ago, there were on average about four rival hospital systems of roughly equal size in each metropolitan area, according to research by Martin S. Gaynor of Carnegie Mellon University and Robert J. Town of the University of Pennsylvania. By 2006, the number of competitors was down to three.

The share of metropolitan areas with highly concentrated hospital markets, by the standards of antitrust enforcers at the Justice Department and the Federal Trade Commission, rose to 77 percent from 63 percent over the period.

And consolidation is continuing. Professor Gaynor counts more than 1,000 hospital system mergers since the mid-1990s, often involving dozens of hospitals. In 2002 doctors owned about three in four physician practices. By 2008 more than half were owned by hospitals.

If there is one thing that economists know, it is that market concentration drives prices up — and quality and innovation down.

Research by Leemore S. Dafny of Northwestern University, for instance, found that hospitals raise prices by about 40 percent after the merger of nearby rivals.

Other studies have found that hospital mergers increase the number of uninsured in the vicinity. Still others even suggest that market concentration may hurt the quality of care.

Article source: http://www.nytimes.com/2013/06/12/business/examinations-of-health-costs-overlook-mergers.html?partner=rss&emc=rss

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DealBook: HSBC Sells Stake in Chinese Insurer for $9.4 Billion

December 5, 2012 by Leave a Comment

HONG KONG — HSBC Holdings, one of Europe’s biggest banks, said Wednesday it would sell its entire stake in a leading Chinese insurer to a Thai conglomerate for 72.7 billion Hong Kong dollars ($9.4 billion.)

HSBC said it would sell its 15.6 percent stake in Ping An Insurance, based in Shenzhen, to the Charoen Pokphand Group, controlled by the Thai billionaire Dhanin Chearavanont, in a deal to be financed partly by the China Development Bank, a policy lender wholly owned by the state of China.

HSBC headquarters in Hong Kong.Bobby Yip/ReutersHSBC headquarters in Hong Kong.

HSBC has been shedding assets to cut costs and streamline its business, and at the same time bolstering its balance sheet in the face of tighter global capital requirements for banks. Since Stuart T. Gulliver took over as chief executive at the beginning of 2011, the bank, which is based in London, has sold more than 40 noncore assets and has booked about $4 billion in gains on those sales this year alone.

HSBC disclosed last month that it was in talks over a potential sale of its Ping An stake, which it started building in 2002, and said Wednesday it expected to book a post-tax gain of $2.6 billion on completion of the deal with the Thai company.

‘‘This transaction represents further progress in the execution of the group’s strategy,’’ Mr. Gulliver said in a statement announcing the sale. ‘‘China remains a key market for the group.’’

Founded in Hong Kong and Shanghai almost 150 years ago, HSBC currently operates 133 outlets across 33 branch offices in mainland China. After the Ping An stake sale it will retain minority investments in several Chinese lenders, including a 19.9 percent stake in the Bank of Communications that is worth around $10 billion at current share prices, a stake in Industrial Bank, a midtier institution based in Fujian Province, and an 8 percent stake in the Bank of Shanghai.

The two-part Ping An transaction will see Charoen Pokphand, a conglomerate with businesses ranging from distribution of agricultural products like fresh eggs to operating one of the world’s biggest chains of 7-11 convenience stores, purchase 1.2 billion Ping An shares from HSBC at a price of 59 Hong Kong dollars ($7.61) apiece.

HSBC said it would transfer 21 percent of the shares to the Thai group on Friday. The sale of the remaining 79 percent of the shares at the same price is being financed partly with cash and partly by a loan from the China Development Bank to Charoen Pokphand, and the transfer of those shares is expected to be completed by Jan. 7, contingent on receiving approval from the China Insurance Regulatory Commission.

Shares in Ping An rose 4 percent to 60 Hong Kong dollars in late morning trading in Hong Kong on Wednesday following the announcement — exceeding the stake sale price by 1 dollar in a sign investors are confident the transaction will go ahead. Shares in HSBC rose 1 percent to 79.50 Hong Kong dollars by late morning, and are up around 35 percent in the year to date.

Article source: http://dealbook.nytimes.com/2012/12/04/hsbc-sells-stake-in-chinese-insurer-for-9-4-billion/?partner=rss&emc=rss

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Bucks Blog: The $650 Doctor’s Bill

November 24, 2012 by Leave a Comment

Paul Sullivan writes this week, in his Wealth Matters column, about turning in desperation to a pediatrician who specializes in babies with sleep problems after many nights of trying to get his infant daughter to sleep for at least a few hours at a time.

The pediatrician quickly figured out what was causing the problem. But the pediatrician, who had driven up from Brooklyn to Paul’s home in Connecticut for the diagnosis, doesn’t take insurance. His fee was $650, and Paul’s insurance company ended up paying nothing on the claim.

Other doctors have also stopped dealing directly with insurance companies, Paul found, mostly because the whole process was frustrating and time-consuming. They argued that their time could be better spent with patients. This switch is mainly affecting primary care doctors and internists, whose reimbursement rates from insurance companies are the lowest among doctors.

With all the changes in health care and insurance, has your doctor gone this route, too? If so, what has been your experience — both with the care and with your insurer?

Article source: http://bucks.blogs.nytimes.com/2012/11/23/the-650-doctors-bill/?partner=rss&emc=rss

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High & Low Finance: Bank of America and MBIA Revisit the Mortgage Debacle

November 17, 2012 by Leave a Comment

The battle being fought on the most fronts is between Bank of America — the bank that made the critical mistake of acquiring Countrywide Financial, once the country’s largest mortgage lender — and MBIA, the troubled monoline insurer that now warns it may not be able to keep paying claims on structured finance securities unless the bank pays it billions for the sins of Countrywide.

The insurance claims that could well tilt MBIA into bankruptcy are likely to be made by Merrill Lynch, which Bank of America acquired during the financial crisis, not long after it bought Countrywide. Kenneth D. Lewis, the bank’s chief executive then, will go down in history as the Ado Annie of Wall Street, after the character in the musical “Oklahoma” who sang, “I always say ‘Come on, let’s go!’ just when I ought to say nix.”

There was a lot of that willingness to proceed while ignoring risks during the credit boom that preceded the crash. Nowhere was it on display more than in the transactions that led to the battles now being waged.

Put briefly, Countrywide sold a lot of mortgage loans to securitizations it created, and paid small premiums to MBIA to insure that investors would not lose money. MBIA issued that insurance after doing no work at all to verify that the loans met the stated criteria, instead relying on Countrywide’s assurances and promises it would buy back bad loans. The securities got top ratings from Moody’s and Standard Poor’s, which also chose to trust rather than verify.

MBIA in those days — the securitizations in dispute covered second-mortgage loans issued between 2004 and 2007 — was a supremely confident organization. It had grown by selling insurance on municipal bonds, insurance that it was confident would never lead to any claims, or at least not to any significant ones. Other insurers had leapt into its market, and MBIA was fighting for market share in the rapidly growing securitization market.

In 2004, the insurer made a fateful decision, to stop doing due diligence on mortgage loans before it issued insurance on securities based on those loans. Countrywide says the evidence shows that MBIA thought premiums were so low that it needed to cut costs; MBIA says that had it taken the time to check, it would have lost the business to competitors.

Countrywide, also fighting for market share, was cutting corners, too. A lot of the home loans it made and put into securitizations seem not to have met the required criteria, a fact that would have been obvious with even minimal review efforts. But nobody was checking.

After the financial crisis exploded, it became clear that MBIA was in enough trouble that it would never be able to sell any new muni bond policies unless it did something. It came up with a clever idea to split in two. The good — United States muni bond — policies would go into one unit. The unit would be well capitalized and have no responsibility for the bad — the foreign government and structured finance — policies. MBIA got its regulator, what was then the New York State Insurance Department, to approve the deal before those who owned the structured finance policies found out about that.

One suit, in which Bank of America challenged the split, went to trial this year. It has been five months since the trial ended, but no verdict has been announced. Whatever that judge decides, an appeal is likely. Another judge, hearing a suit filed by MBIA claiming that Countrywide committed fraud in unloading bad mortgages into the insured securitizations, may soon decide whether to throw out the suit (as Countrywide wants) or declare MBIA a winner without a trial (as MBIA wants.)

Unfortunately for MBIA, the deadline for getting more cash is approaching. It expects to pay out a lot of money on one set of particularly foolish policies — with Merrill Lynch, now owned by that same Bank of America, as the recipient. It appears that MBIA will not have the cash to pay the claims, although it is not clear how soon that will happen.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2012/11/16/business/bank-of-america-and-mbia-revisit-the-mortgage-debacle.html?partner=rss&emc=rss

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DealBook: U.S. Plans to Cut More Than Half Its Stake in A.I.G.

September 10, 2012 by Leave a Comment

The Treasury Department said on Sunday that it was planning its biggest sale of shares in the American International Group to date, making the federal government a minority shareholder in the bailed-out insurer for the first time since it took control of the company four years ago.

With the sale of at least $18 billion worth of shares in A.I.G., a number that could grow to $20.7 billion if investors prove enthusiastic, the Treasury Department could reduce its holdings to as little as 15 percent from 53 percent.

Taking the government’s stake in A.I.G. below 50 percent is the realization of a long-held goal by both the Obama administration and the company, helping to cut ties to one of the most controversial bailouts of the 2008 financial crisis. The Treasury Department expects to earn a profit on its investment in A.I.G., though it is unclear how large.

“This was always meant as a temporary measure,” Henry T. C. Hu, a professor at the University of Texas School of Law at Austin, said. “The faster we can do this as a practical matter, the better for everyone involved.”

Professor Hu described the A.I.G. bailout as one of the government’s first major interventions in the economy and private enterprise, setting the stage for other major rescue operations.

The latest offering will take place during the heat of the electoral campaign, as the president seeks to defend the use of taxpayer money to save financial institutions like A.I.G.

Administration officials have long said that they would seek to sell off the holdings in private enterprises as quickly as possible, arguing that the government is not a natural long-term shareholder.

Regarded as one of the world’s most powerful insurers by the fall of 2008, A.I.G. nearly crumbled under the weight of risky bets on mortgages as the debt markets soured. The Bush administration intervened with an unusual $182 billion lifeline to help stabilize the global financial sector.

In the process, it gained a roughly 92 percent stake in the insurer.

But the rescue plan was initially denounced by some critics as likely to cost the government billions, while also leading to a breakup of the company.

Four years later, the company has turned around. It has reported several consecutive quarterly profits, while seeing its stock rise more than 10 percent since the government began selling its holdings in May of last year.

The company’s shares closed on Friday at $33.99, above the government’s break-even price of about $28.73.

The offering announced Sunday will be the fifth sale of A.I.G. shares by the Treasury Department and is the latest effort by the government to unwind the A.I.G. rescue this year. Last month, the Federal Reserve Bank of New York announced that it had sold the last of a collection of risky bonds acquired from the insurer as part of the bailout. All told, the sale of those securities reaped about $9.4 billion for taxpayers.

Yet the government remains entangled in a number of other corporate rescues, including those of General Motors and Ally Financial. The remaining bailouts are expected to be largely unprofitable, especially those for the fallen mortgage finance giants Fannie Mae and Freddie Mac.

A.I.G. was initially expected to fall into that camp, subject to a fire sale of assets that would lead to its quick wind-down. But under Robert H. Benmosche, the insurer has instead focused on rebuilding its operations, becoming smaller and more cautious about keeping away from the risky bets that nearly caused its demise.

Since its bailout, the company has sought a more orderly sale of assets aimed at maximizing the prices it can fetch. Those include the divestiture of stakes in major international insurance operations like the AIA Group and the American Life Insurance Company.

And A.I.G. is preparing to raise more capital by staging an initial public offering for its aircraft leasing business, the International Lease Finance Corporation.

As part of the stock sale announced on Sunday, A.I.G. plans to buy back about $5 billion of the shares that Treasury is selling. Some of the proceeds will come from the company’s sale last week of additional shares in AIA.

The reduction of the Treasury’s stake below 50 percent is likely to bring about other changes for A.I.G. Its primary regulator will become the Federal Reserve, since the company owns a small banking unit. And it may become subject to potentially tougher rules governing its capital, affecting its ability to continue buying back stock.

The sale is being managed by Citigroup, Deutsche Bank, Goldman Sachs and JPMorgan Chase.

Article source: http://dealbook.nytimes.com/2012/09/09/treasury-to-sell-18-billion-worth-of-additional-a-i-g-shares/?partner=rss&emc=rss

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Setback for Bank of America in MBIA Lawsuit

January 4, 2012 by Leave a Comment

Justice Eileen Bransten of the New York State Supreme Court ruled that to show fraud, MBIA need only show that Countrywide had misled it about the $20 billion of securities that it insured, not that the misrepresentations caused its losses.

MBIA accused Countrywide of misrepresenting the quality of underwriting for about 368,000 loans that backed 15 financings from 2005 to 2007, while the housing market was booming. It said it would not have insured the securities on the agreed-upon terms had it known how the loans were made.

“No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” Justice Bransten wrote, citing New York common law and insurance law.

While not ruling on the merits of the case, the judge lowered the burden of proof on MBIA to show Countrywide had committed fraud and breached the insurance contracts.

She also said MBIA could seek damages for its losses, rejecting Countrywide’s argument that the insurer’s only remedy was to void its insurance policies. MBIA had said that would be unfair to investors.

Manal Mehta, a partner at Branch Hill Capital, a hedge fund in San Francisco, said Bank of America had lost “one of its key defenses in the ongoing litigation over mortgage putbacks by the monoline insurers.”

Neither Bank of America nor MBIA officials were immediately available to comment.

Article source: http://feeds.nytimes.com/click.phdo?i=df53286b491f8aa03bc14a632772427b

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Contracts Cloud Who Has Exposure in Greek Crisis

June 22, 2011 by Leave a Comment

No one seems to be sure, in large part because the world of derivatives is so murky, but the possibility that some company out there may have insured billions of dollars of European debt has added a new wrinkle to the sovereign default debate.

In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted. But this time around, swaps and other sorts of contracts have become so common and so intertwined in the financial markets that there are fears among regulators and financial players about how a Greek default would play out among derivatives holders.

The looming question is whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default. If there were a single company standing behind many of these contracts, that company would be akin to the American International Group of the euro crisis. The American insurer needed a $182 billion federal bailout during the financial crisis because it had insured the performance of mortgage bonds through derivatives and couldn’t pay on all of them.

Even regulators seem unsure of whether a Greek default would reveal such concentrated risk in the hands of just a few companies. Spokeswomen for the central banks of both Europe and the United States would not say whether their researchers had studied holdings of such contracts among nonbank entities like insurance companies and hedge funds — and they would not say what would occur among large players if Greece or another European country defaulted.

Derivatives traders and analysts are debating just how much money is involved in these derivatives and what sort of threat they pose to markets in Europe and the United States. On the one hand, just over $5 billion is tied up in credit-default swap contracts that will pay out if Greece defaults, according to Markit, a financial data firm based in London. That’s less than 1 percent the size of Greece’s economy, but that is a conservative calculation that counts protections banks have in place offsetting their positions, and is called the net exposure. The less conservative figure, the gross exposure, is $78.7 billion for Greece, according to Markit. And there are many other types of contracts, like about $44 billion in other guarantees tied to Greece, according to the Bank of International Settlements.

The gross exposure of the five most financially pressed European Union countries — Portugal, Italy, Ireland, Greece and Spain — is about $616 billion. And the broader figure on all derivatives from those countries is unknown.

The pervasiveness of these opaque contracts has complicated negotiations for European officials, and it underscores calls for more transparency in the derivatives market.

The uncertainty, financial analysts say, has led European officials to push for a “voluntary” bond financing solution that may sidestep a default, rather than the forced deals of other eras. “There’s not any clarity here because people don’t know,” said Christopher Whalen, editor of The Institutional Risk Analyst. “This is why the Europeans came up with this ridiculous deal, because they don’t know what’s out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. They’re holding us hostage. The Street doesn’t want you to see what they’ve written.”

Regulators are aware of this problem. Financial reform packages on both sides of the Atlantic mandated many changes to the derivatives market, and regulators around the globe are drafting new rules for these contracts that are meant to add transparency as well as security. But they are far from finished and could take years to put into effect.

Darrell Duffie, a professor who has studied derivatives at the Graduate School of Business at Stanford University, said that he was concerned that regulators may not have adequately studied what contagion might occur among swaps holders, in the case of a Greek default.

Regulators, he said, “have access to everything they need to have. Whether they’ve collected all the information and analyzed it is different question. I worry because many of those leaders have said there’s no way we’re going to let Greece default. Does that mean they haven’t had conversations about what happens if Greece defaults? Is their commitment so severe that they haven’t had real discussions about it in the backrooms?”

Regulators aren’t saying much. When asked what data the Federal Reserve had collected on American financial companies and their swaps tied to European debt, Barbara Hagenbaugh, a spokeswoman, referred to a speech made by the Federal Reserve chairman, Ben S. Bernanke, in May in which he did not mention derivatives tied to Greece. And she said in a statement that the Fed had researched the “full range of exposures” at the companies it supervises — the banks — and is “monitoring the situation more broadly.”

At the European Central Bank, Eszter Miltenyi, a spokeswoman, said : “This is much too sensitive I think for us to have a conversation on this.”

On Wall Street, traders are debating whether the industry’s process for unwinding credit-default swaps would run smoothly if Greece defaulted. The process is tightly controlled by a small group of bankers who meet in an industry group called the International Swaps and Derivatives Association. .

The process is fairly well developed, but it has been little tested on the debt of countries. For the most part, Wall Street has cashed in on credit-default swaps tied to corporations’ debt.

Only one country has defaulted on its debt in the last few years — Ecuador at the end of 2009 — and its debt was so small and its economy so isolated that it was hardly a notable event.

Article source: http://feeds.nytimes.com/click.phdo?i=fc513885a4cc6c244d9b077cbfa05007

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California Insurer Says It Will Cap Earnings

June 8, 2011 by Leave a Comment

The insurer said it would limit its profit to no more than 2 percent of its revenue and said it already planned to return $180 million, the profit the company says it made above its 2010 target.

“With our 2 percent pledge, we hope to make coverage a bit more affordable for our members,” Bruce Bodaken, Blue Shield’s chairman and chief executive, said in a speech at the Commonwealth Club in San Francisco. “But more important, we want to demonstrate that health care affordability, which is the key to universal coverage, is Blue Shield’s top priority.”

In a telephone interview, Mr. Bodaken said: “It’s one further step in a long series of steps in which we believe that we and others all need to step up and reduce the cost of health care.”

While it is unclear whether other insurers will make similar pledges, the federal health care law is aimed at making sure insurers are not able to set their premiums too much above their costs. Some experts expect other insurers to take similar actions as the law goes into effect.

“This would be the logical next step,” said Timothy S. Jost, a law professor at Washington and Lee University, who said some insurers have already started considering similar refunds. Last September, for example, Blue Cross and Blue Shield of North Carolina said it planned to refund $156 million to policyholders.

Blue Shield of California said it would refund $167 million to policyholders, typically giving them a 30 percent credit toward one month’s premiums. A family of four, for example, may receive $250 toward the cost of a policy. Hospitals and doctors that participate in programs aimed at better coordinating care for patients will receive $10 million, and the insurer’s foundation will receive $3 million.

As a nonprofit, the insurer does not generate returns for investors but uses any money it earns to further its mission.

An early proponent of many of the changes in the federal health care law, Blue Shield has been the target of public outcry. Like many nonprofit insurers, Blue Shield has been criticized for seeking large premium increases and for maintaining overly generous reserves. Federal and state regulators are increasingly scrutinizing the rate requests of all insurers because of the federal health care law, and medical costs have been lower than many companies had anticipated, leading to substantial profits.

Mr. Bodaken said the decision to limit profits was made well before state insurance regulators raised concerns about its rate increases. Earlier this year, Blue Shield bowed to pressure from regulators and consumer groups and dropped a request for higher rates. “It really has nothing to do with our rate increases,” he said.

California lawmakers are considering legislation that would give state regulators the authority to approve insurers’ rate requests before they go into effect. Federal and state officials emphasized that Blue Shield’s actions did not diminish the need for strong regulatory oversight.

Kathleen Sebelius, the secretary of health and human services, said in a statement: “While such voluntary efforts are great for Blue Shield’s policyholders in California, today’s announcement also reinforces the importance of the Affordable Care Act and rigorous state review of insurance rates.”

California’s state insurance commissioner, Dave Jones, who has pushed for state legislation that would allow him to block excessive rate increases, said Blue Shield’s action demonstrated the need for the law. “The announcement is an admission by an insurer, in this case a nonprofit insurer, that they are making excessive profits,” he said.

The insurer’s profits about doubled from 2009 to 2010 and he said its $3.5 billion in reserves were higher than regulations require.

Consumer advocates also emphasized that Blue Shield’s pledge did not change the need for regulators to make sure insurers were not charging people too much. “Certainly, there are some consumers who will be getting rebates who will welcome the news,” said Anthony Wright, executive director of Health Access California, a state advocacy group. Still, he said, “consumers should not be overcharged on the front end.”

Given the recent outcry over its high rate requests and the generous pay package of its chief executive, which amounted to $4.6 million last year, Blue Shield may be trying to improve its image, Mr. Wright said.

To address the high cost of health care, Mr. Bodaken said that insurers like Blue Shield must work with hospitals, doctors and patients to address some of the underlying cost pressures. But he said the insurer’s goal was to demonstrate that it was not seeking higher profits when it asked for higher rates.

“It makes it very clear that we are not about profits,” he said. “We are about getting people health care they need and deserve.”

Article source: http://feeds.nytimes.com/click.phdo?i=027d5c6564bc7c1a0c6ad0e9e2f4fd89

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A.I.G. to Sue 2 Firms to Recover Some Losses

April 28, 2011 by Leave a Comment

The initial suit, against ICP Asset Management and Moore Capital, will claim that A.I.G. suffered losses insuring mortgage securities created by ICP. The suit says ICP manipulated those securities in a way that benefited itself and Moore Capital, which is not accused of fraud, but harmed A.I.G.

Though the insurer received a hefty bailout, much of that money ultimately flowed to banks. Now, A.I.G. is trying to “recoup potentially billions of dollars from the fraudulent conduct of these defendants and other parties,” according to a copy of the suit obtained by The New York Times.

Because A.I.G. is still largely owned by the government, taxpayers would share in any recovery. A.I.G. informed the Treasury Department of the suit on Wednesday but made the decision to sue on its own, according to a person with knowledge of the litigation. A.I.G. did not notify the Federal Reserve Bank of New York, which orchestrated its $182 billion bailout in 2008, because the company has repaid the Fed and is no longer tightly overseen by that regulator.

As part of the bailout, A.I.G. waived its right to sue banks over most of the mortgage securities that it had insured through complex financial contracts known as derivatives. But the company did not give up its right to sue the managers of those deals — like ICP — nor did it cede rights to sue over $40 billion of mortgage bonds that it had purchased outright from banks. These bonds were responsible for a substantial portion of the company’s losses and were held in a unit that handled securities lending, separate from the derivatives unit.

A.I.G. is preparing several suits against banks, like Bank of America and Goldman Sachs, that created the $40 billion in mortgage bonds, according to the person with knowledge of the litigation, who was not authorized to talk about it publicly. The company says it believes the banks issued misleading statements about the quality of the mortgages within those bonds, the person said.

Mark Herr, a spokesman for A.I.G., declined to comment on the company’s planned cases against big banks — which could be settled before going to court — or the ICP case to be filed on Thursday.

A.I.G.’s suit against ICP mirrors a lawsuit filed by the Securities and Exchange Commission last summer. The commission cited four mortgage securities, including two deals known as Triaxx, that were insured by A.I.G. ICP caused Triaxx to overpay for mortgage bonds to benefit itself and a favored client, the commission said.

ICP has denied the S.E.C.’s allegations in court filings and said that the company acted in good faith, did not make misleading statements and did not intend to defraud its investors. Margaret Keeley, a lawyer for ICP, declined to comment on the S.E.C.’s allegations on Wednesday. Ms. Keeley and ICP have not seen the A.I.G. suit.

The S.E.C. did not identify Moore, a large hedge fund in New York run by Louis Bacon, or accuse it of wrongdoing. Moore benefited from some actions of ICP, however, and should give up its gains, the insurer argues. Two spokesmen for Moore, which was also unaware of A.I.G.’s complaint, declined to comment.

A.I.G. believes other investors made similar profits and plans to sue them as well, once it learns their identities, the person briefed on the litigation said.

ICP may be one of few lawsuits brought by A.I.G. involving its derivatives unit called A.I.G. Financial Products, based in Wilton, Conn. Another derivatives case could be brought against Goldman involving seven of its deals known as Abacus. A.I.G. will have trouble suing over most of its other derivatives deals, because when it canceled those contracts, it signed a legal waiver agreeing to release the banks on the other side of the contracts from any future legal claims related to those contracts.

A.I.G. is said to believe it will be far easier to pursue lawsuits related to the unit that ran its securities lending operation because that unit had bought the bonds outright and did not renegotiate them as part of its 2008 bailout. The unit sought to make profits for A.I.G. by using shares of stock and bonds owned by its life insurance subsidiaries. To do so, A.I.G. lent shares to banks and hedge funds in exchange for cash. Then A.I.G. reinvested much of that cash in mortgage bonds that it believed were safe bets. Like many investors, A.I.G. was surprised when the bonds — called residential-mortgage-backed securities — plummeted in value in 2008.

These future lawsuits will focus on misrepresentations that A.I.G. claims banks made when selling the mortgage bonds. Bank of America has the largest exposure because it acquired Countrywide and Merrill Lynch. Other banks that underwrote bonds in A.I.G.’s securities lending unit and may be sued are Goldman, Morgan Stanley and Bear Stearns, which is now owned by JPMorgan Chase. The banks may try to reach settlements with A.I.G. to avoid going to court.

The law firm representing A.I.G., Quinn Emanuel, has filed other suits involving mortgage bonds on behalf of other insurers. A.I.G.’s suits against banks are likely to mimic those cases, which allege misrepresentations to investors over the quality of loans inside the bonds, the person with knowledge of the matter said.

In an unusual twist, A.I.G. no longer owns the mortgage bonds that will be the subject of the suits. The company sold them to the New York Federal Reserve in 2008 in a deal called “Maiden Lane II.” At the time of that sale, A.I.G. was paid about half of the bonds’ face value — locking in a large loss.

The road map for A.I.G.’s lawsuit against ICP was outlined by the S.E.C. Each case involves two collateralized debt obligations — bundles of mortgage bonds — called Triaxx that were worth $7.7 billion. When ICP created the deals in 2006, it partnered with A.I.G. to insure the performance of the deal. That allowed banks like UBS and Goldman — the largest participants — to buy both positive bets on Triaxx and insurance from A.I.G. in case it failed.

ICP managed lots of funds and other deals. A.I.G. says in its suit that those deals presented conflicts. ICP was supposed to ask A.I.G. for permission before it put new bonds inside Triaxx, the suit says. But as the mortgage market worsened, the suit says, ICP failed to do so on several occasions. In addition, A.I.G. says that ICP used Triaxx to help another one of its funds meet a demand for cash. Furthermore, ICP earned money from Triaxx longer than it should have because it overcharged Triaxx for certain assets, A.I.G. says.

A.I.G. is seeking $350 million in damages from ICP as well as what it calls a “windfall” made by Moore.

Article source: http://feeds.nytimes.com/click.phdo?i=f27d2bc15a1d3aafa7e972ad49b3ef5b

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Bucks: Gold’s Price and Your Jewelry Stash

April 21, 2011 by Leave a Comment

Spencer Platt/Getty Images

Gold prices have skyrocketed over the last decade, which means your jewelry may be under-insured if you haven’t had it appraised recently.

Jewelers Mutual, a specialty insurer based in Wisconsin, recently surveyed 428 married women and found that more than half of them either had never had their engagement rings appraised or hadn’t done so in the prior 10 years. That could be a costly oversight if they lose or damage a piece, given that gold now sells for close to $1,500 an ounce, or more than six times the roughly $240 an ounce it brought 10 years ago, says the metals site, kitco.com.

Michael Maley, vice president of personal insurance lines for Jewelers Mutual, says jewelry owners should take their pieces to a reputable jeweler for an updated appraisal, and should check their policies to see what their coverage limit is. He has seen some instances where the existing coverage wasn’t enough to pay for the full replacement cost of a piece of jewelry. “If you got married 20 years ago,” he says, “is that limit still adequate?”

The Insurance Information Institute, an industry group, says a homeowner’s insurance policy typically covers the theft of jewelry up to a set limit — $1,500 is standard — but usually doesn’t cover damage to the item, or loss. You can purchase additional protection at extra cost, by having the item “scheduled,” or itemized, on the policy. The extra coverage, often called a “floater,” also adds protection for damage or loss–including, say, accidentally washing your ring down the kitchen drain.

Another option is to buy a specific jewelry policy, which is what Jewelers Mutual sells. Such policies are priced depending on the value of the piece and its location (higher crime areas carry higher rates) and can cover repair or replacement of the jewelry if it is lost, stolen or (my personal favorite insurance term) the subject of a “mysterious disappearance,” which is when an item is gone, but it’s unclear if it was lost or stolen. (Such situations might include, ‘my gold watch is gone but I’m not sure what happened; did it fall off when I was mowing the lawn, or was my house burglarized?’)

Scheduling the item on your homeowner’s policy or buying a specialty policy both require that you have the piece evaluated, or appraised. Mr. Maley says it’s a good idea to have jewelry inspected periodically anyway, to make sure clasps or prongs aren’t damaged, perhaps putting a gem at risk.

Have you recently had your jewelry appraised? Did you need to increase insurance coverage as a result?

Article source: http://feeds.nytimes.com/click.phdo?i=18ecf3ee4bcb86eead3d2ea6f8623ed0

Filed Under: Your Money Tagged With: , ,