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Derivative Risks Rising: Sell-Off in Interconnected Mega Banks and Insurers

Courtesy of Pam Martens

New York Stock Exchange Trading Floor

New York Stock Exchange Trading Floor

The Dow Jones Industrial Average has lost 838 points in the past two days of trading. On a percentage basis, its losses pale in comparison to the losses experienced over the past two days by some of the biggest global banks as well as insurance companies that are derivative counterparties to the big banks.

Mega banks continue to be allowed to tie their risky trading gambles to the balance sheets of insurers that also hold life insurance policies and retirement annuities for Moms and Pops across the U.S. by using the insurers as counterparties for their derivative trades. That this is still happening illustrates just how little has changed in the way of enlightened regulation of Wall Street since the banks brought down the big insurer, AIG, in 2008. The U.S. government was forced to seize AIG and institute a $185 billion bailout. AIG also held life insurance policies and retirement annuities for Moms and Pops across the country while it was simultaneously backing tens of billions of dollars of credit derivatives for Wall Street banks, which it couldn’t make good on.

The AIG bailout money went in the front door and then out the back door to Wall Street banks, foreign banks and hedge funds who were the recipients of over half ($93.2 billion) of AIG’s bailout money. AIG was eventually forced to release a chart of these payments – although it is still not clear if these disbursements cover the full scale of what was paid to AIG’s derivative counterparties since the chart covers a limited timeframe.

We know which insurance companies are making risky derivative gambles with the mega banks because the 2017 Financial Stability Report from the Office of Financial Research (OFR), the Federal agency created under the 2010 Dodd-Frank reform legislation, named them. Those U.S. insurers are: Ameriprise Financial, Hartford Financial Services Group, Lincoln National Corp., Prudential Financial, Voya Financial, MetLife and – as a commentary on the failure of Dodd-Frank – AIG is still in the game.

Over the past two trading days this is how those seven insurers have fared: Lincoln National Corp. has lost a whopping 8.4 percent; Ameriprise Financial has given up 8.24 percent; MetLife fell 6.5 percent; Voya Financial has lost 6.3 percent; Prudential Financial was down 6 percent; while Hartford Financial Services Group and AIG fell a more modest 4 percent.

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