SubscribeTDI Episode 64: Confessions of an Economic Hitman
July 6, 2008
Guest: John Perkins, author of Confessions of an Economic Hit Man and The Secret History of the American Empire. We discuss what exactly an economic hit man is, the American Empire, the challenge from China, the collapse of our way of life just to name a few.
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John Perkins is the author of Confessions of an Economic Hit Man, a startling expose of international corruption that spent over a year on the New York Times bestseller lists and has been published in more than thirty languages. 
A former economic hit man, he is a founder and board member of Dream Change (www.dreamchange.org) and the Pachamama Alliance, nonprofit organizations devoted to creating a stable, sustainable, and peaceful world. He has lectured and taught at universities on four continents including Harvard, Wharton, and Princeton, and is a champion of environmental and social causes.
You have to read his books. Start with Confessions of an Economic Hitman, then read Secret History. Great reads!
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TDI Episode 52: Supercapitalism
April 14, 2008
Guest: Robert B. Reich, Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. We discuss the economy, politics and his latest book, Supercapitalism.
Professor Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism.
His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Professor Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s “Marketplace” are heard by nearly five million people. (Subscribe to Robert Reich Commentaries in iTunes)
In 2003, Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.
We discuss:
- Supercapitalism - The Transformation of Business, Democracy and Everyday Life.
- People are taught all along that “the big guys” bend the rules to get wealthy…Why not them…?
- Harry Dent theory 2009 - What is the chance that we are entering a long term recession? Depression?
- WHERE IS THE NEXT PROBLEM?
- Via Barry Ritholtz: “Who should Obama replace Bernanke with?”
- The worldwide food shortage, how can we protect ourselves (fill them bunkers!)
- Seems to be a transparency problem today … people scratching their heads about what is going on.
- Unions..? Any good any more? Do they serve any purpose?
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The ZachZone focuses on: Chipotle Mexican Grill Inc. (CMG), Digital Domain (DTWO), American Water Works Co. (AWK), and Intrepid Potash (IPI)
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Stocks Discussed in this episode: Capital One Financial (COF), Washington Mutual Inc (WM), Wachovia Inc (WB), Bear Stearn (BSC)
Listen to The Disciplined Investor in iTunes
Out of the Credit Mess in 1-2-3: Blame, Blame, Blame
January 14, 2008
This week appeared an interesting article from the Wall Street Journal that is just one in a broad series looking to once again cast blame for the economic mess we are now experiencing. The author sites sources that explain how the mortgage brokers (among others) are the new villains in the ongoing credit market chaos. Unfortunately, that is only partly true. It seems that the brokers/scapegoats have been tagged as the ones that are originating mortgages with a high level of default. While that may have occurred, please forgive me, but who ultimately sets the approval standards for those loans?
The blame game continues and until someone stops the madness and bellies up with a plan that makes sense, we are going to continue down a path that leads to financial ruin. It is the same-ole’ political battle that now has Bank of America playing the knight in dull, but shining amour. They stepped in with a helping hand in August and now they are left with the responsibility of cleaning up the rest of the mess.
On this week’s Meet The Press, Senator Clinton proposed a plan to freeze mortgage increases for 
the next five years. In the interview with Tim Russert, she said, “…I want to freeze interest rates for five years, and I want to have a $30 billion package that will go in and try to stabilize the housing market and stabilize communities that are going to be affected by that.” To that, Mr Russert asked, “But, Senator, many people opted for those cheaper mortgages. They could’ve had a fixed mortgage at a higher rate, but they opted for a cheaper one. Should they not bear some responsibility?” Then with a gentle motion and a touch of pixie dust, Senator Clinton solved the entire problem with this exceptional plan; “…I think all of us should. But I’d say three things about that. The bankers, the mortgage lenders, the brokers, all bear a lot of the responsibility, because many of the practices that were followed were just downright predatory and fraudulent. There is no doubt about that. I started talking about this last March. A lot of people got into subprime loans who frankly could’ve been in a conventional fixed-rate loan. They were basically told that this was a better opportunity for them. Should they take responsibility? Yes, but look at what will happen if we continue this cascade of foreclosures. Housing values are down. They’re down 6 percent. That’s over $1.3 trillion in housing values in the last year. So everybody bears some responsibility. I went to Wall Street last month to tell Wall Street they had to be part of the solution because they sure had been part of the problem.”
It seems that the politicians and the lack of any meaningful oversight had nothing to do with it. It is unbelievable how much Read more
The Coming Death of the Insurance Industry
September 17, 2007
This is frank discussion about growing epidemic that is set to become one of this countries biggest scams. It is so monumental that it has the potential of bringing down the entire insurance industry… Seriously. If you scare easily, stop reading now. (Note: Podcast 28 has an amazing interview with Steven Leimberg on this subject, subscribe via iTunes to ensure delivery on Sept 19th)
Never before has the insurance industry faced such a cataclysmic onslaught of potential claims than they will begin to see in only a few decades from now. This is a crisis, which was set in motion by a rather innocent idea and has now turned into a greed-infested scheme. If left alone with no intervention, it will have us all looking back in 20-30 years wondering how and why we could of let this happen.
The financial media is finally picking this up as a front-page concern (Business Week Story) and we are seeing something new just recently with shares of Life Partners Holdings (LPHI) that is beginning to look rather ugly. But why is this coming to their attention just now? It is because for years now, the insurance industry has been systematically pilfered and companies are starting to worry about their future. What started out as a small crack, has now become a major crevasse. Is it will be a wonder if some of the companies will actually survive. No, No, No, not because of a hurricane or tornado. Not even from massive fires or devastating floods or the threat of global warming. Nothing natural can come close to how this is going to affect the industry. This is purely man-made.
It started with an idea from Prudential around 1988. At the time, it was innovative and extremely beneficial to policyholders. You see, back then; AIDS was causing a terrible problem as experimental treatments were very costly. When a patient’s money ran out – they had few alternatives. Prudential devised a way for those who were afflicted to sell their life policies for a substantial amount in return for assigning the death benefit back.
This was the incarnation of what was to become known as Viatical Settlements. The original plan quickly morphed into an investment scheme for many unscrupulous companies who realized that those that were in need of funds would sell their policies for almost any amount. Fair or not. Investors poured in with the promise that within a short time (as AIDS patients had limited life expectancies) they would profit by 15%-25% on their investment. Even as concern was raised about the morals of such a plan, Viatical Settlement companies were popping up in record numbers. It was on later that investors learned that this no-risk plan had many problems and their easy profit wound up turning into ugly losses.
Along the way, the greedy got rich by setting up phony guarantees and investors were fleeced of millions of dollars.
This was just the beginning. These days everyone profits from this (except the insurance industry) and it is finally becoming topic in focus. It can be said that the plan has morphed into a win-win-win-lose scheme.
Now you have a basic background and the genesis of Viatical Settlements - though they are now referred to as Life Settlements amongst the politically-correct. (Think of Stewardess/Flight Attendants and Garbage Men/Sanitation Engineers)
Today, the players are many and the scheme is gaining popularity: It did not stop there; in fact it only gets worse. Presently, the numbers are a lot bigger as the schemes get more and more crafty. These days, seniors are the ones that are selling policies to investor groups – and why not? They too are in for a piece of the profit.
Here is how a typical plan works: First, an insurance agent approaches a senior (usually 75 years old or so) and sees if they are willing to have a life insurance policy bought on their life. Often times, the insured will be required to have a net worth well in excess of $1 million as this plan works much better with higher death benefits. A company, specializing in loans for this investment plan, will advance the annual premiums for 2 years. This is important, as there is no money actually changing hands or expended from the insured to the insurance company. When the policy is issued, the insured usually retains the rights for exactly two years, until the contestable period is over.
Contestable Period Definition - Life insurance policy clause that provides a time limit (usually two years) on the insurer’s right to dispute a policy’s validity based on material misstatements made in the application.
When the loan comes due at the end of the “contestabilty period” the agreement will usually stipulate that the policy will revert ownership to the company (depending on the exact terms of the arrangement) that provided the advance on the premium (premium plus interest of 10% plus annually). This is important, as this is where the profit potential is realized - For the second time! From this point they try to sell the policy to other investors looking to profit from the death of the original insured – the third profit potential.
We could stop there and say that there are several issues that stink to high hell:
- 1) Insureds are induced to do this, as there is BIG MONEY in it for them; assuming all goes well. I have personally seen insureds receive $100,000 PLUS for simply standing in for an insurance exam and signing policy paperwork. I know of several more who received much higher “inducements”.
2) Agents stand to make huge profits as they are usually paid anywhere from 50%-70% of the first years premium on these types of policies.
3) The loans for the premium are charged at a rate significantly above market
4) The higher the death benefit, the better the plan works for all involved
a. Higher Premiums equal higher agent commissions
b. The greater the financial worth of an insured, the higher the death benefit
c. The higher the death benefit, the higher the premium resulting in the more “inducement” the insured will be paid
Here is where it gets tricky. Since there is a significant financial incentive to showing a net worth as high as possible; financial creativity is key. Valuations can be “enhanced” on real estate and businesses rather easily as can the approximated value of other assets. This is a real conflict that should be (but isn’t) taken seriously. Unfortunately, I have also seen several occasions where agents show insureds how to “optimize” these values in order to qualify for a higher death benefit. Just to be clear, this is not just a friendly exaggeration of values that one may do on the golf course. This could be deemed FRAUD.
The risk is weighed against the potential for a nice payday if the plan is approved. The usual decision is no surprise. (Picture the three monkeys with their hands over their eyes, ears and mouth)
Now, here is the reveal of how the life insurance industry is facing potential extinction if nothing is done:
As a practical matter, insurance companies build assumptions as to the percentage of policies written that will lapse into their pricing models. Since policies purchased only to be sold to investors will never lapse, insurance companies will have to pay claims much greater than they paid for. To add insult to injury, rather than paying full premiums, investors usually pay in only the minimum necessary to keep the policy going, thereby depriving the carriers of the capital necessary to invest to pay interest or dividends and cover maturing claims.
As for the insurance industry: “Be careful what you ask for; you might get it….” To be fair, the insurance industry is not without blame. They welcomed the record breaking sales and have turned a blind eye to the potential abuses in pursuit of short term profits. As one described it, “they took a bite of the poison apple; and they liked it….” Now, they’re bailing water as fast as possible to avoid the pending actuarial disaster.
The concept of life insurance was born out of a notion of public trust and common good and special tax incentives were granted as an inducement for bread winners to buy insurance to protect their widows and orphans from becoming wards of the state. While the greedy modern day robber barons will argue that it’s property and you ought to be able to do what your want with it, we can not lose sight of the fact that it’s a very special type of property and different from stocks, bonds, real estate and other commodities.
To purchase life insurance one must have an “insurable interest”- a risk of loss that would occur if the insured dies. Theoretically, one’s life and children are presumed to be better off if their husband or father stays alive. The purpose of the insurance is to replace some or all of the income the insured would have earned had he lived.
In these pre-sold, financial arrangements, it’s exactly the opposite. When outside investors are the beneficiaries, the sooner you die the better their internal rate of return. Life insurance is reduced to no more than a gambling contract which is against public policy.
With ever mounting deficits, it may only be a matter of time until congress strips life insurance of it’s favored tax treatment; thereby making it more costly for “Average Americans” to obtain the coverage they need and upholding a sadly ever-expanding phenomenon of the greedy few destroying an important family financial instrument for the masses.
Many carriers are now fighting back. Some send out investigators to interview insureds as to why they bought the insurance or what they expected would happen so they can rescind contracts. Others simply are refusing to accept collateral assignments and requests for change of ownership. Many have updated their applications to include questions that require disclosure of any financing arrangements, up front incentives or potential sales opportunities.
Even though promoters still tell prospects “not to worry about it” there’s Read more
A Miracle: Bush Parting the Bankrupt Sea
August 31, 2007
If the today’s economic story can be related to bible story, it would have to be the one where Moses parted the Red Sea. Back then, Pharaohs soldiers were chasing the Jews towards a dead end represented by the Red Sea. Then, after much hoping and praying, a miracle occurred. The Sea was parted and the Jews passed safely. Then, the soldiers were swallowed up and drowned as the sea closed around them.
Bush is now helping individuals who were moving towards a dead end by aiding financial companies that are closing in on the Bankrupt Sea. In this circumstance, the soldiers that will drown this time are Investors and Hedge Funds that went short on the homebuilders, banks and markets.
The flood that will kill them will be in the form of a short-covering rally initiated by several key economic results as well as the realization that there will be a governmental bailout if necessary.
According to news sources:
The President on Friday is to talk about several initiatives and reforms to help homeowners with risky mortgages keep their homes, a senior administration official said Thursday. Bush also is to discuss efforts to prevent these kinds of problems from arising in the future.
Bush also planned to:
—Urge Congress to pass Federal Housing Administration overhaul legislation that would give the FHA more flexibility in assisting mortgage holders with subprime mortgages.
—Pledge to work with Congress to reform the tax code to help troubled borrowers rework their loans.
—Call for rigorously enforcing predatory lending laws and strengthening lending practices.
Companies such as Countrywide (CFC), Bank of America (BAC), Toll Brothers (TOL), Beazer Homes (BZH), Bear Stearns (BSC), Lehman (LEH), Goldman Sachs (GSC) and the entire financial sector will surely get a huge lift from this move and short-covering. What stocks will get hurt today? Ummmmm, nothing that we can think of. This is a good move by our government for the most troubled borrowers(unless Bush does something really odd during his speech later today or Bernanke usurps President Moses Bush with comments that are at less than positive and supportive)
President Bush to speak at 11am and Fed Chief Bernanke to speak at 10am today
Horowitz & Company clients hold positions in some of the stocks mentioned in this article
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