Saturday, June 30, 2012

The Death of Private Health Insurance

I just heard someone touting Obama care stating this would end the outrageous premiums the insurance companies were charging. Remembering back to an interview with the head of Blue Cross in February of 2010 here is an excerpt from my blog post two years ago.

Last Wednesday a Congressional committee grilled Angela Braly the CEO of Wellpoint Health Insurance (Anthem Blue Cross). House member Bart Stupak was upset that Angela was paid a million a year and the Company made 2.7 billion dollars. The fact that it was a 4 percent return on investment, didn’t sink through Representative Stupak’s head. He kept referring to the 2.7 billion dollar profit, being a lot of poor people’s insurance premiums; that was just too much profit for a private insurance company. He thought that a 39 percent increase in premiums was outrageous. As an investor, a 4% return is pretty poor also. Common sense suggests that no company would raise rates 39 percent just to make a profit. Irritating your policy holders doesn't help when it comes to renewals.

In the investment world, a 20 percent return is more of the norm. The question arises why play here if you can make more money elsewhere? The other point to ponder, if there is gobs of money to be made in health care, there would be more competition for those big bucks.

The point that impressed me at this interview was the fact that a private company trying to make a profit, was charging rates that allowed it to survive. To some the rates seemed exorbitant. But that is always the case when you can’t afford the premiums. The private sector has to know all the costs of doing business. Make a wrong estimate and the company is out of business.

Some of the provisions of Obamacare spell the end of health insurance. No limits on claim amounts and no denial for previous conditions, cannot be tolerated in a for profit insurance business model. These values have to be defined. It is grand and noble to want to cover every condition, but as a business model, it cannot survive. As a government model it can survive, governments do not need to make a profit. Can Blue Cross compete against the government model?

The Democrats point to the "unfortunate" 50 million people who are uninsured. Without doing any research, I would guess the group of people from the age of 18 to 40, are the 50 million people without coverage. At their age, they're immortal, why buy health insurance? But with them paying premiums into the system, the insurance companies could offer lower rates to everyone. These young people are not about to buy health insurance, they’ll pay the tax.

Once the government destroys the health insurance industry by eliminating their ability to make a profit, then Obamacare will be free to charge (TAX) whatever they need to kick the can further down the road. The neat thing about this, raising health care rates will be done by a committee not Congress, so it won’t be considered a tax increase. We the people will have no control over it. We will pay for steak and end up getting dog food. Government run programs are a little like public restrooms, they get used and abused.

There is no reason for a company to sell health insurance if they can’t make a reasonable profit. And of course any business where the government tells you what you can or can’t charge for, is one to be avoided, especially if they are the competition. Big government it going to teach private health care insurance a lesson. John Q Public gets to keep their present health insurance until it goes out of business. It’s a little like signing up for a cruise around the world-- it’s when they pass out the oars, that you realize this isn’t quite what you had in mind. Plus the fun part, you won't know the costs of the tour until after the cruise.

Copyright 2012 by Jim Brubaker

Sunday, June 24, 2012

The Difference between the Great Depression of 1929 and Today's

Lately you hear, “This is the worst it’s been since the Great Depression!” Think about it for a minute, know anyone that was around for the last one? They’d have to be about 100 years old. There is only history and statistics to define our present plight. So far, we seem to be off of the charts, of course, it’s still not a depression; it’s just the worst thing we have ever experienced.

What makes this depression different than the 1929 one? Credit, lots of it. Psst wana buy a house cheap, boy do we have a deal for you, sign here no money down. I can’t get 2 percent on my savings in the bank, but I can get 2 percent back on my consumption using my credit card. Want to buy on plastic with monthly payments? 20 percent  or more interest. Of course to point out the obvious, no one had a credit card in 1929.

The banks in Greece and Spain are not running out of money when the depositors make a run on the bank. In 1929 a bank run, would close the bank and put it out of business.

It has been suggested that there could be a possible charge card frenzy in Europe. People would buy on their card until the credit card companies refuse to honor them. This could have global ramifications. Credit has been abused worldwide by everyone and most excessively by governments. What happens if the world goes on mad buying spree and decides to buy and put it on plastic?

Bond yields in the US are down to one percent. Where is the incentive to save? Insurance companies invest their premiums in the financial arena and policy rates depend a lot on investment returns. Their worst case scenario model for future income generation from investments never went this low. The net result, insurance premiums have to at least double and a lot of people will no longer be able to afford insurance. We are talking, health care, life, fire and car insurance to name a few.

The CalPERs retirement plan has a real big headache. Their investment model assumes an 8 percent return on investments. Using the rule of 72, their invested funds double every 9 years. So if you’re a part of that plan and are 9 years away from retirement, the money you have in that fund is not going to double as anticipated. CalPERs did nothing wrong, their business model went to hell. As a retiree, you’re guaranteed X amount for life. X/2 is not an anticipated outcome, but it is a probable one.

Where was the mistake made? Everyone went on the assumption that the short term economic model would continue and it didn’t. The housing bubble collapsed and Congress picked up the tab. Then the financial bubble collapsed leading to massive bailouts and now we only have the national debt bubble. Of course, that’s not a bubble; we can still pay the interest on the debt.

The 17 trillion is real money borrowed from real people. Ever wonder who we borrowed that much money from? And why are they happy with 2 percent interest? But wait, interest rates, given time, will get back to 8 percent when good times return. There is just one little hitch, the interest on the national debt will be too large to pay.

Of course, there are two types of depressions, deflationary ones and inflationary ones. In 1929 our currency was married to gold and silver and it was a deflationary one (the country couldn’t print money). Today's dollar is not backed by any precious metal (Congress can print dollars). Conclusion: our money isn’t as real as the currency during the Great Depression. That’s what makes this depression different from the last one. This one is inflationary and of course Ben is putting out the deflationary fires.

Gold and silver are an option to consider. Not as investments, but as a good store of value. A silver quarter will buy two gallons of gas.

Copyright 2012 by Jim Brubaker

Monday, June 11, 2012

Belt Tightening, Pay Cuts For Everyone, Retirees Included

It looks like the voter is going to hit on government employee wages. Every survey so far, shows the benefits and wages paid to the government workers far exceed what is paid in the private sector. The governor in Wisconsin didn’t get recalled and it looks like he’s going to cut some things a lot of people take as god given rights. The voters that tried to get him fired, have a payback coming.

When I was a kid, everyone joked around about government jobs not being real jobs. You started there, got experience and then moved on into the private sector if you wanted to earn some real money. Over the last 50 years, something changed and it was hardly noticeable, but it sounded like good common sense. “Let’s pay these government employees enough so they don’t quit and go to the private sector.” In hindsight, that doesn’t seem like a very smart thing.

The big thing to notice is that these wage surveys of the private sector, were based on pay for performance. If you were good, you got paid more. From there, each government job is linked to that private sector wage survey. Pay for performance drops out of the equation. Your government pay will keep up with the private sector whether you produce or not. And then there are the government benefits that are locked to the wage rate. So it’s not hard to see how government employees can retire with 100k per year pensions. It went from “the pays lousy, but they have good benefits,” to “The pays great and so are the benefits.”

This happened very slowly over 50 years. When times were good, no questions were asked. Now in today’s bad economy, there aren’t enough funds to pay for everything promised to the workers.

This gets worse if you look at retirement pension funds. At an 8 percent interest rate the funds of a pension fund double in 9 years. Well, rates are about ONE PERCENT. The rule of 72 here, means that the fund won’t double for 72 years. But most of the calculations of benefits were done when rates were 8 percent or higher. Hmmmmmm.

North Carolina has invested their retirement funds in some high performance stuff to get the return they needed for their retirees. Kind of make you wonder if they were Greek or Spanish Bonds?

We have come to a fork in the road. Pay all benefits or pay for services. Not an easy choice. And this is just the beginning! Bad choices are being made every day now to keep things as they once were, and that just isn't possible. I wonder, how long to we have to wait before some of these State financial insolvency problems start to hit the fan? There is no such thing as reserved seating in a lifeboat.

Copyright 2012 by Jim Brubaker

Wednesday, June 06, 2012

Put Fannie and Freddie to Sleep

In the beginning, Congress created Fannie and Freddie to make homes affordable to more Americans. It was a fulfillment of the American Dream, home ownership. There are renters and there are homeowners. Raise your hand if you have owned your home 100 years or longer; so basically everyone reading is a renter.

When the housing bubble took off, everyone was financing homes, and they sold the paper to the banks, Fannie, Freddie and private investors. Any bad performing loans that the banks held, have probably been turned in for foreclosure redemption. Basically the loan insurer eats the first 20 percent of the loan amount on a home (Fannie, Freddie and VA); the bank eats the second 20 percent. Looking back over time, there hasn’t been a span of time where a bank could sustain a 20 percent loss on a home loan with 20 percent down unless you go back to the Great Depression. The bank has an owner cushion of 20%, and their losses start from there, they could sustain a 40 percent drop in equity without sustaining a loss.

But about the year, 2000 everyone was writing zero down “no doc” loans. The two GSE’s, Fannie and Freddie packaged up the paper and sold it to anyone. They made gobs of money and then things started to go south.

Once the bubble burst, you have millions of home owners in homes with no money down and they are upside down on their loan. Fannie, Freddie and the VA are left holding the bag. They guaranteed the loans. Congress realizes that they need to bail out Fannie and Freddie to keep the housing market from collapsing. If it collapsed, the losses would be catastrophic. But if they can keep people in the homes and make payments of some sort, the game can go on. The other thing they needed to do was find a source of low interest rate financing to entice people to buy the homes that they have already guaranteed. The Federal Reserve did that by dropping interest rates to unheard of levels. Notice Fannie and Freddie didn’t drop the prices of the homes they held by much, but they did reduce the qualifying requirements for the loan - - nothing down, but take the original note with very little discount. Second, release the homes very slowly. Fannie and Freddie own these homes at full list bubble prices.

The government guaranteed these GSE’s and assumes all losses. Ask yourself one question. Has the mission statement of Fannie and Freddie changed? Is it to make homes more affordable to our children? Or to cut the losses of these GSEs? Fannie and Freddie have nothing to lose by selling a home to just about anyone with nothing down. A vacant home is on the books as a loss, a signed contract is a performing loan. The problem here, the new owner may make one payment and ride free for two years. As far as Fannie and Freddie are concerned, that’s a good thing; the house is occupied and less liable to be stripped out. Talk about job security, inefficiency keeps the ball rolling.

The issue here isn’t banks, it is Fannie and Freddie, these two programs are a dis-service to the community. They need to be stopped in their tracks and the homes put on the market, what ever the price. We need to sell homes with 20% down payments. Fannie and Freddie are circumventing this common sense rule. What they are doing should be against the law and it isn’t. The banks can’t do it so why should the GSE’s under government management.

It’s a little like when my dog was terminally ill, I was doing everything for him, because he was my best friend, and then I realized, I wasn’t really doing him a favor by extending his suffering, I was just satisfying my needs for his companionship. I had to make a hard decision, and it was something I still shed a tear over when I think back about it.

Reality is right around the corner (of course if you are dealing with deck chairs, it's a lifeboat away). Not sure how this will turn out, but it is obvious, the decisions that have to be made are not being made. Can we trust the political judgment of our government and Congress? I think not. But if we terminate those two (failed) GSE's, pricing reality may emerge in the real estate market. The real irritating thing, is that we know that just isn't going to happen!

Copyright 2012 by Jim Brubaker