Friday, February 25, 2011
A number of commentators have raised the question of whether the low-interest rate policies of the Federal Reserve are stoking global inflation in commodities, food and energy. The answer to that question seems to be yes, but the inflationary pressure caused by the Fed’s purchases of US Treasury debt and zero short term interest rates is being manifested in many sectors and features the appearance of new “special purpose vehicles” in the insurance sector.
The reckless practices and financial transactions that led to the collapse of first Enron, then WorldCom and later American International Group (”AIG”) are alive and well, in large part due to the low-interest rate policies of the Fed and a good bit of credulity on the part of state legislators and insurance regulators.
Consider a hypothetical based on a real transaction outlined in a forthcoming paper which veteran insurance fraud investigator Tom Gober and I are writing:
You are a large, publicly traded health insurer. A leading New York dealer in OTC derivatives proposes a financing transaction that will enable the health insurer to create a surplus in its capital account and free up cash to fund a shareholder dividend. But first some background.
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