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Date: February 25, 2010
Subject: Who insures the insurers?

This is
G&G Associates Tax & Financial Consulting

Who insures the insurers?

Hotep G&G Readers,

The first wave of mortgage defaults occurred starting in mid-2007 with the blowup of subprime mortgages.

We’re currently in a lull, as refinance dates for alt-A mortgages will begin to spike later this year. Adjustable rate mortgages haven’t been a big issue yet thanks to absurdly low interest rates.

But More Pain is on the Way…

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Nevertheless, the potential for a spike in rates and the continuing ugly unemployment picture spells further problems in the real estate market. This will bode poorly for holders of Mortgage Backed Securities (MBS).

As you may remember, banks and other originators took a bundle of subprime loans, packaged them into an MBS, and sold them at a significantly higher rating than the sum of the underlying loans—the financial equivalent of alchemy. Only instead of turning lead into gold, what they did was more like making manure resemble gold…that is, until people saw what it really was.

One should be wary of any institution holding significant amounts of MBS… most of the major institutions that packaged them sold them off to others, so don’t go looking at the big banks.

While many pension and government funds foolishly accepted the ratings at face value, so did many insurers. This means insurance companies could have ticking time bombs on their books—and could suffer the same blowup that AIG faced in 2008.

One notable company in this area is Hartford Financial (HIG).

In fact, while banks have been rushing to repay their TARP bailout funds, insurance companies have stayed off the repayment radar.

It’s time to bring in the bomb-sniffing dogs and minesweepers to find these hidden bombs in an insurance company’s investment portfolio.


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Until the next time!
Asante Sana (Thanks)
Gary Gray
Tax & Financial Consultant, RFC
G&G Associates
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