Friday, June 12, 2009

A Flock of Black Swans Just Landed

Well friends, we have been discussing the next phase of the economic collapse for some time and I just wanted to point out that a flock of Black Swans just landed (thank you Nassim for the metaphor). In a rather inconspicuous gesture, this morning saw the announcement by The Hartford (the 200-year legacy life and property insurer) that they are taking $3.4 billion in TARP funds and selling up to $750 million of common stock. What makes this significant is what their liquidity challenges represent.

For sometime, I’ve been advising that the reason why Washington is scrambling to put bandages on the hemorrhaging patients in the economy is because there is a greater (and known to at least some of them) specter looming in the darkness. The unholy cover-up seeks to mask the fact that the much touted illiquidity of entitlements (in the form of Social Security and health care obligations) are real but the greater exposure is the significant lack of capital to meet contracted payment obligations in the private sector. Life insurers, annuity managers, pension managers, and others – all who were all too happy to scoop fat fees off of managing investments – are not only undercapitalized to meet obligations but, more unfortunately, the safety net in the PBGC is also illiquid. I seem to be alone in pointing out that the AIG bailout had nothing to do with the importance of insurance (look at the fact that AIG doesn’t want to pay for the US Airways Hudson River miracle) but it served as a money-laundering facility to push funds to banks and other financial institutions with whom AIG had counter-party credit risks. However, the laundry exercise was a smokescreen for a greater risk that The Hartford and Allianz balance sheet uncovers – namely that the pension guaranties, together with life insurance obligations – two stalwarts of American retirement comfort – are in massive trouble and that shoe is falling now.

In case you’re not convinced, ask yourself why unions wound up with so much of the automotive bankruptcies. It’s not to confuse the line between management and labor (thus causing Keynes to do back-flips in his grave) but rather it is to shield the public from seeing the degree to which pensions have been short-changed and mismanaged.

“The Armageddon-risk is off the table,” according to Hartford’s Chairman and Chief Executive Ramani Ayer in his June 12, 2009 interview on CNBC. That’s good because it never was on the table. As I discuss in my radio interview which will be broadcast Monday, June 15 on VoiceAmerica, we’ve got some serious reckoning coming and a tiny piece of tribulation and judgment may be served in the main dining room. No dark horsemen – just a few black swans!

For more encouraging reading, check out the two previous posts from the Chicago Globalization for the Common Good Conference.



  1. Your 15 June 2009 interview on ZOOM'D was excellent as usual.

    One thought and one question:

    1) As I have said before, I remain extremely concerned about the fact that there will likely not be any peaceful solution to the pension fund insolubility crisis. In my line of work, I talk to common laborers often. These people will not take their loss of pensions calmly.

    2) If the current administration does allow a tax holiday by allowing us to rebalance our tax-deferred retirement accounts, would not that rebalancing event hasten the collapse of the dollar or at least make the pension insolvency a more concrete reality.

    I think there are more than a few Black Swans hanging around. I imagine the Hitchcock movie "The Birds" except only with Black Swans. Not a pretty picture......

  2. McQuain - the pension unrest will be violent if we don't get engagement and discourse about it's management now. Your concern is right and I'd encourage a wide an discussion on this as possible.

    With respect to the tax holiday for asset rebalancing, I believe that your concern about the dollar is well-placed but the absence of a global fair market vote of confidence actually fuels even greater risk on the pension side so it's a bit of the lesser of two undersirables.


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave