Man Behind Desk: “Mr. Brain, As you know, we here at Fiero & Company are re-re-insurers. We provide insurance to re-insurers, who insure insurance companies.”
Brain: “Is that lucrative?”
Man: “Take a look.” (opens drawer)
Brain: (big eyed smile) “Ahem!”
– Pinky and the Brain, S1E2, “Of Mice and Man”
One of the basic principles of Barataria is that “Banking should be boring”. The main argument against financial regulation is that it stifles innovation. Yet that hallmark of the 2000s has been the source of excessive risk and nearly all the trouble we find ourselves in today. When banking is boring, the world is quiet and stable and those of us not in financial dealings have a decent chance of actually getting ahead.
The same is true of insurance. That’s not only true as a matter of policy, it’s apparently true as a matter of making a lot of dough.
One of the hot stocks today is AIG, a symbol of the 2008 collapse. The US Government financed bailout of the insurance giant wound up topping $182 billion when their complex position in derivatives collapsed. The market simply blew up around them and it was either be bailed out or collapse completely. AIG was “too big to fail”, so we all were on the hook for the cash. It was big pile of dough to swallow at once.
How did they come back to being the darling of Wall Street? By concentrating on the plain vanilla and very boring business of insuring the old fashioned way. No longer do they buy and sell complex positions in derivatives – they write policies and collect premiums on all kinds of homes, businesses and financial transactions. It’s a very boring way of making money, but they recently paid back in full the money that they borrowed 4 years ago to stay afloat. Mazeltov!
CEO Robert Benmosche got a healthy 24% pay bump now that AIG is no longer under the terms of the bailout, which prohibited excessive CEO pay. It’s back to party time as usual! Except AIG’s business as we know it would hardly be a fun topic at a party. It really is about as boring as it could be.
How dull? Recently there was a story that AIG planned to sue the US Government over the terms imposed by the bailout. It turns out that was a bum rap – most of the press got the story wrong. Their old CEO Maurice Greenberg is preparing a suit, which they were forced to consider, but AIG wants nothing to do with it. They even filed a motion with the court to block the suit, claiming that Greenberg has no right to sue on AIG’s behalf.
Translation: “Please don’t paste a target on our backs! We don’t do dat junk no mo’!”
Distancing themselves from this (frivolous) suit is obviously good business, but more to the point it fits in with the new culture at AIG. They make money the old fashioned way – very quietly. Too big to fail? Too big to take unreasonable risks. There was no “moral hazard” at AIG for one simple reason – it’s far more profitable to behave properly, no matter how boring that is.
It’s worth noting that AIG is not the only one of the too-big companies that realizes the value of being quiet. We’ve talked a lot about how dangerous JP Morgan (JPM) has become, almost daring Congress to regulate them while taking part in shady operations to prevent that from ever happening. That company, running at the bleeding edge of innovation, has a tendency to periodically bleed very badly. The risk is high and the market is starting to stay away from them.
Contrast that with Goldman Sachs (GS), a company that was also bailed out in 2008. Their savior was not the government but Warren Buffett, who is in the process of becoming its largest shareholder. Goldman still gets into trouble in the press from time to time, but largely stays out of the spotlight. GS stock is up about 40% over the last year, but JPM is up less than 10%.
What is the lesson for those financiers who want to rule the world? High-risk trading and innovation may give the rush to a high rolling gambler, but it also has a similar return. The secret to real money and power is by being boring – and staying with the businesses that are proven over time. It’s not just good for taxpayers, it’s good for stockholders.
The free market works! Well, it does to the extent that those who run big financial companies are more interested in long-term gain than a short-term scheme for world domination. We can expect cartoon mice to have some trouble with this concept, but educated adult humans?
What was that argument against regulation?