Conservatorship

Abstract: Foreword - Douglas F Morgan Series Editor's Introduction - Henry D Kass Bureaucratic Leadership in a Democratic Republic A Model of Administrative Conservatorship Conserving Mission Conserving Values Conserving Support The Administrator as Conservator

Abstract: This paper is concerned with insurance company insolvency and the ability to identify a firm with a high probability of financial distress. Financial distress is defined as a firm that entered into liquidation, receivership, conservatorship, or rehabilitation during the time period of the study (1966-1971). Multiple discriminant analysis was used in this study to classify firms into two groups (solvent or distress). The model developed was able to classify correctly forty-nine out of fifty-two firms included in the study. One solvent firm was classified as being distress while two of the distress firms were classified as belonging to the solvent group. The six variables that were used to classify firms were: 1) agents balances/total asset ratio, 2) stocks-cost (preferred and common) /stocks-market (preferred and common) ratio, 3) bonds-cost/bonds-market ratio. 4) (loss adjustment expenses paid + underwriting expenses paid) /net premiums written ratio, 5) combined ratio, and 6) premiums written direct/surplus ratio. Insurance regulation involves at least three distinct activities; agent and company licensing, rate regulation, and company solvency. This paper is concerned with the latter of these three responsibilities of the insurance commissionerinsurance company solvency. More specifically, it is concerned with those property-liability insurance companies that experienced financial distress in the time period 1966 to 1971. Financial distress is defined as those firms that entered into liquidation, receivership, conservaThe authors are respectively: Assistant Professor of Risk Management and Insurance in the University of Georgia, and Associate Professor of Finance and Faculty Research Associate, University of Missouri-Columbia. The authors would like to express their appreciation to the University of Missouri Research Council and the Insurance Departments of the states of Arkansas, Illinois, Indiana, New York, Ohio, Pennsylvania, Texas, and especially Missouri for their support and cooperation. This paper was presented at the 1972 Annual Meeting of A.R.I.A. torship, or rehabilitation during this period. Insurance company insolvency has been a major concern of regulators, consumers, and insurance company executives for many years. L. B. Brainerd, past president of the National Association of Casualty and Surety Executives (NACSE), said that insurance company insolvency is the main area of concern of insurance regulation, and that regulation in this area has been lax compared with the other areas of insurance company regulation.' He advocates stricter supervision, rather than reimbursing of policyholders for their losses due to insurance company insolvency. Presently, the National Association of Insurance Commissioners (NAIC) has a model bill that will reimburse policyowners for losses up to $50,000 due to insurance company insolvency. This or simiI Business Insurance. October 25, 1971. n28

Abstract: Introduction and summary At yearend 1991, Congress enacted fundamental deposit insurance reform for banks and thrifts in the Federal Deposit Insurance Corporation Improvement Act (FDICIA). This reform followed the failure of more than 2,000 depository institutions in the 1980s. Many of these institutions failed at a high cost to both shareholders and taxpayers, as a result of the incentive-incompatible structure of the government-provided deposit insurance at the time. This structure encouraged both moral hazard behavior by banks that increased their risk taking and poor agent behavior by regulators that delayed the imposition of appropriate regulatory sanctions on financially troubled institutions. As a result, the ultimate cost of resolution of insolvent institutions paid by U.S. taxpayers amounted to almost 3 percent of gross domestic product (GDP).(1) FDICIA put deposit insurance and other parts of the federal government safety net underlying depository institutions on a more incentive-compatible basis by providing for a graduated series of regulatory sanctions that mimic market discipline. These sanctions first may and then must be applied by the regulators to troubled banks. In this article, we review the important features of both the old and new safety net structures and evaluate the early results of FDICIA. At yearend 1990, U.S. banking was in its worst shape since 1933. Some 1,150 commercial and savings banks had failed since yearend 1983, almost double the number of failures from the introduction of the Federal Deposit Insurance Corporation (FDIC) in 1934 through 1983 and equal to 8 percent of the industry at yearend 1980. Another 1,500 banks were on the FDIC's problem bank list (rated in the lowest two examination categories). Five percent of the total number of banks, or some 600 banks, which held 25 percent of the industry's total assets, reported book-value capital of less than 4 percent of their on-balance-sheet assets. Under FDICIA, these banks would have been classified as undercapitalized. The thrift industry was in even worse shape. More than 900 federally insured savings and loan associations (S&Ls) were resolved or placed in conservatorship from 1983 to 1990. However, because there were far fewer S&Ls than banks, this number represented 25 percent of the 4,000 odd associations operating at the beginning of the decade.(2) Many more associations were economically insolvent, but were permitted to continue to operate as a result of government guarantees of their deposit liabilities. Nearly 400 S&Ls reported tangible book-value capital ratios of less than 3 percent in 1990, including more than 100 that reported negative ratios. The cumulative losses incurred by the failed institutions exceeded $100 billion in 1990 dollars. These losses resulted in the insolvency and closure of the S&L's government insurance agency - the Federal Savings and Loan Insurance Corporation (FSLIC) - and its replacement by the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) within the FDIC, which were capitalized primarily by taxpayer funds authorized in the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. FIRREA provided some $150 billion of taxpayer funds to resolve insolvent associations. During 1991, the banking industry continued to deteriorate rapidly. There was widespread fear that the banks would go the way of the S&Ls and the FDIC the way of the FSLIC, requiring further significant taxpayer funding. In response, at yearend, Congress enacted FDICIA. The act brought fundamental deposit insurance and prudential regulatory reform and is the most important banking legislation in the U.S. since the Banking Act of 1933 (Glass-Steagall). It dramatically altered the banking and regulatory playing field. At yearend 1997, the banking industry had recovered significantly and was in its best financial health in decades. …

Abstract: We describe and evaluate the measures taken by the U.S. government to rescue Fannie Mae and Freddie Mac in September 2008. We begin by outlining the business model of these two firms and their role in the U.S. housing finance system. Our focus then turns to the sources of financial distress that the firms experienced and the events that ultimately led the government to take action in an effort to stabilize housing and financial markets. We describe the various resolution options available to policymakers at the time and evaluate the success of the choice of conservatorship, and other actions taken, in terms of five objectives that we argue an optimal intervention would have fulfilled. We conclude that the decision to take the firms into conservatorship and invest public funds achieved its short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship led to tensions between maximizing the firms’ value and achieving broader macroeconomic objectives, and, most importantly, it has so far failed to produce reform of the U.S. housing finance system.