Insurance companies:
The Treasury yesterday granted preliminary approval for some of the nation’s largest insurance companies to receive capital infusions under the government’s Troubled Assets Relief Program, Treasury spokesman Andrew Williams said.
Recipients are Hartford, Prudential, Allstate, Ameriprise, Lincoln National and Principal Financial Group, he said. The insurers notified yesterday are among hundreds of financial institutions in the pipeline “that are being reviewed and funded as appropriate on a rolling basis,” Williams said.
The money could shore up the life insurance industry, which plays a major role in the economy and has been weakened by the financial crisis. In addition to paying death benefits, life insurers deliver retirement income in the form of annuities. They are big investors in corporate bonds and commercial real estate.
I hope this is only the beginning, but consider the following:
The Commercial Real Estate Time Bomb has gone off but it has been lost in the euphoria of economic cheerleading and bottom calls based on dubious (at best) earnings reports from banks. Here are a few headline items from the past week or so to consider.
***And so a tsunami of commercial real estate bankruptcies is just offshore, fueled by a change in consumer attitudes. Few have bothered to take note. Complacency in commercial real estate is not justified nor will it be rewarded.
The financial well-being of the insurance companies is inextricably tied to the health of CRE, and that is exploding. As always, I’m a rookie at all this and really don’t know what I am talking about, because I am just piecing things together from a number of different sources. I hope I am reading this wrong, but I fear this could be as bad as or worse than everything we have already gone through.
blogenfreude
And here comes the next round of mortgage resets. Ownership society, bitchez!
bago
Given that CDS’s are basically insurance policies on investments…
jon
Commercial real estate is contingent on retail sales which are contingent on jobs which is contingent on lots of money making its way here and there. With an estimate of something like 40% of retail chains being in serious financial trouble soon (source: something from Kunstler.com’s happy bunch of economics links on his website,) commercial real estate is looking overpriced.
As for insurance, it bears repeating: insurance makes its money by calculating the amount it will pay out in claims and invests the rest in whatever looks good at the time. Bad investments lead to increased rates for those seeking insurance. And really bad investments lead to insurers begging the government for help. And really bad investments seem to have been made.
Face
Wont the Baby-Boomer die-off pretty much fuck these insurance companies as the market continues to tank?
Dennis-SGMM
CRE was being wildly overbuilt here in SoCal well before the crash. Seems as though every swatch of land with street frontage was spouting office complexes and/or strip malls. The building went on despite the fact that many already existing properties were under occupied. I kept wondering just how many Mongolian barbecues, discount shoe stores, Psychic Spiritual Advisers, and Notary Publics do we really need?
scarpy
I can’t find the cite right now, but somebody did throw up a chart recently showing that CRE represents a much, much smaller amount of money compared with residential, so there’s just a lot less capital for investors to lose. That may be cold comfort when we’re hanging on by fingertips here, but at least it suggests that this hit won’t be worse than what’s come before.
I hope.
The Other Steve
In our neighborhood of Minneapolis…
It appeared to me that commercial real estate started a new boom right around late 2007/2008 as the other building industry collapsed.
I suspect in large part because they were able to negotiate 30-40% less in construction costs then prior to that point to keep the building companies busy.
So we have a number of new office buildings, mostly vacant.
But it’s my understanding amongst CRE investments that vacant property is calculated into the assumptions, as it’s not uncommon to have office space sitting empty for at least a year or more.
The Other Steve
Overall, CRE is a smaller market.
The problem with CRE however is that one hit is pretty big. When you consider they might spend $100 million or so just building one commercial complex, and the recoup on a bank sale yields a lower percentage than a home sale.
So if one project goes bust, it’s a lot worse than one person defaulting on a house.
The Other Steve
Weird, if I want a Notary I just go to my bank.
However, Mongolian barbeque is the awesome and the world can never get too many of those. :-)
Granted, we only have one, two if you count the chinese buffet that has a little bbq in the corner.(which is actually the only thing there that tastes good, but I think it’s because they have curry available in powder form so you can get some good flavor going)
Michael
There’s lots and lots of empty commercial real estate sitting empty around here. There is a glut, and the rates are still too high inasmuch as
1. A number of commercial landlords have excessive fixed obligations related to acquisition costs;
2. There is a universal tendency from commercial landlords to expect business-crushing returns on their investment of capital. Capital is supposed to grease the skids for production, not be parasitic to the point of crushing the host. Triple net leases which demand significant supplemental rent based on a tenant’s income are not indicative of a sane system of the allocation of capital.
HyperIon
@Dennis-SGMM:
I wonder about Nail and Tanning salons.
There are a ton of these in strip malls in Seattle. Why?
scarpy: re:I can’t find the cite right now..
Calculated Risk?
jcricket
The problem with the CRE bust isn’t its size, it’s that it comes on the heels of a consumer real estate bust (i.e. already weakened lenders and builders are ill-prepared to deal with another medium-sized hit) and that another big bust – consumer debt is right around the corner. And after that there’s the big corporate bankruptcies/bond defaults (i.e. Chrysler bankruptcy). It really is the perfect storm – and the banks, insurance companies, real estate firms, etc. are completely toast.
But, back on topic, Mish is a confirmed bear/skeptic. I’m not sure I buy the analysis that we’re doomed to Japanese-like lost decades, or permanent declines in the American standard of living. People like Mish have been around during every recession, predicting that “this is the game changer, we’ll never recover” and they’ve been wrong 12 times now (for different reasons each time). Maybe it’s naive, but I’m betting they’ll be wrong this time too.
Frankly, if I’m wrong it doesn’t really matter – we’re all doomed anyway, and there aren’t any real steps to prevent the situation, so might as well enjoy my Bourdeaux and filet while I can.
jcricket
@HyperIon: Because each ethnic minority seems to have its own “business type” that they like to open. And our (Seattle) ethnic minority is Asian (Vietnamese, Chinese, Japanese), and they open nail salons and dry cleaners.
If we lived somewhere near a lot of Mexican immigrants there’d be more taco trucks.
The Sphynx
@jcricket: And because it is cloudy in the PNW. Tanning salons help some people with seasonal affect disorder.
Glidwrith
If any of these insurer’s are actually HEALTH insurers, I’ve got no sympathy whatsoever. That subset of industry keeps reporting double-digit profits then claims to their customers that costs keep rising so they have to increase the premium rates at double-digits. Maybe the so-called costs are their investments going bad so they’re sticking their bad judgement to both customers and government – a double whammy.
Comrade Kevin
@The Sphynx: John Boehner?
The Sphynx
@Comrade Kevin: His looks more like the spray-on to me… better for the skin but doesn’t combat the blues at all.
asiangrrlMN
@The Other Steve: Wait, you live in Minneapolis, you know a lot about real estate, and you are a Christian (I think). Are you my brother?????
So, bottom line here, how much money will they get from me to shore up their flagging businesses?
And why the fuck isn’t this all being called corporate welfare?
Robertdsc-iphone
I though TARP only had +/- 100 billion left. If these insurers need more than that, where’s the money coming from?
Separately, what would happen if there were no bailout & we let them go under?
Michael
Dummy – because everybody knows that welfare is defined as money which is recklessly handed out to shiftless negroes who want to rob you, rape your women and cut your throat.
Rex
@jcricket and Hyperlon
Another reason is that, as investors were seeking to stabilize their strip malls, that is one business that was always looking to take the space. The lease rate is probably lower than everyone else in the center but then you could have it entirely leased up when you listed it for sale/refinanced it and not get dinged for lease-up costs or vacant space deductions. Another extremely common tenant profile were Check Cashing/Payday Loan places but these usually paid pretty cush rents.
In evaluating strip malls, once they have leased space to an inline church, the end is nigh.
One final interesting thing about the comments, is that I am not sure how deep the Chinese ethnic minority is in Seattle. Dollar Stores and Chinese restaurants are typical ethnic businesses for those immigrants and Seattle is lacking in both. I tend to think that it has something to do with the anti-Chinese riots in Seattle in the late 1880s but have no way to prove it.
Dobby
I would only support a bailout of insurance companies under three conditions:
1) We hyper-analyze their applications for relief. For example, if they list “John Smith” as their CEO and he also goes by “John C. Smith,” deny!
2) We hold the insurance companies to all sorts of random technicalities. Address of first largest subsidiary not typed in 12-point arial narrow? Denied!
3) When we finally disburse the TARP funds, we give the insurance companies a fraction of what they ask for based on a “schedule” and we make them wait at least six months while we claim to “lose their paperwork” or need additional random forms from them.
gwangung
@Rex:
Chinese Americans are the second largest group in the state and are about the second largest in the Puget Sound area.
However, this includes a big chunk of second, third, and fourth generation people (which means, they’re already professionals who aren’t in the labor intensive industries). A lot of the first generation immigrants are high tech level folks, drawn to Microsoft, Boeing and the University of Washington (and I think are relatives of the older generation).
patrick
yay, when I changed jobs in ’05 I rolled my 401K into a Hartford Annuity. currently it’s down about 25-30% of the principle value I put in, and about 45% of it’s peak…