The Myth of the “Free Market” in Health Care

A Thank You Note to the Free Market

 

Dear Free Market,

Where have you been?  The latest news is that, when it comes to health care, you really haven’t been around. In fact, it seems there is no ”free market” switch in health care – just competing economic sectors lobbying to protect their own margins at the expense of each other – and, ultimately, the consumer.  A New York Times article shows how pharmaceutical companies are pressuring state governments to make health insurers pay the price for  their own exorbitant margins.

Lawmakers in at least 20 states  have introduced pharmaceutical company designed bills to limit out-of-pocket payments by consumers for expensive drugs used to treat diseases like cancer, rheumatoid arthritis, multiple sclerosis and inherited disorders. The bills counter efforts by health plans to reduce the amount they pay for expensive medicines by making the patients pay 20 to 35 percent of the cost. To counter the increasing cost, insurers have to do this by putting specialty drugs into a fourth tier category with higher co-payments, or co-insurance.

Pharmaceutical companies benefit from this legislation because high co-payments discourage patients from taking medicines. So who do you think has actually been drafting and promoting these bills? Could it be…the pharmaceutical industry?

Pfizer has been helping the legislative drive behind the scenes, even drafting some of the bills, according to legislators and patient advocates…Mark Merritt, president of the Pharmaceutical Care Management Association, which represents pharmacy benefit managers, said the real problem was the price of the drugs. The legislation, he said, was an effort by the pharmaceutical industry to “turn a pricing problem into a coverage issue.”…Sharon Treat, executive director of the National Legislative Association on Prescription Drug Prices, an organization of state lawmakers, said that insulating patients from the cost of their drugs “gives the drug companies a free ride to charge as much as they want.

The “Free Market” Isn’t Dead – It Just Smells Funny

So “free market” really means one sector passing the cost of exorbitant mark-ups onto another by lobbying government to insulate themselves from responsible pricing.  And Washington lacks the will to do what every developed world economy that has gotten a handle on health care costs has done – to regulate health care costs.

Thank you, Free Market

Free market, here’s what you’ve done to US healthcare:

• The U.S. is number 1 of the top 19 Western developed countries, in money spent for medical and health care, in absolute dollars and percentage of the Gross Domestic Product.
• The U.S. is also number 1 in worst cost-effectiveness in reducing death rates.
•  U.S. health expenditure as a share of GDP since 1970 has outstripped all other high-income OECD countries, with a five-fold increase in health spending per capita.
• Health expenditure as a share of GDP was 40% higher than the OECD average in 1970 and is now 80% higher.

Why are health care costs in the United States so much higher than any other OECD country?

1. High provider costs: It’s true that we use a lot of expensive diagnostic tests, such as MRI and CT scans, and perform a lot of interventions where it is not always clear-cut whether the procedure is necessary. But the primary reason is that care costs more here than in other countries. The same hospital care costs 60% more in the United States than in a cross section of other countries. 50 high-selling pharmaceuticals cost 60% more in the United States than in Europe.
2. Administrative inefficiencies: A third of U.S. health care expenditures goes toward administrative costs (Canada spends less than half that — about 16%.) This also pays the salaries of everyone from phone operators to top executives, as well as for claims processing and sales.
3. The fee-for-service model that most health insurance plans use, under which physicians make more money with every office visit and procedure they do – which gives them an incentive to push for more, not necessarily better, health care (Shannon Brownlee, “Overtreated: Why Too Much Medicine Is Making Us Sicker and Poorer.”)
4. The lack of national price-setting to ensure low per unit prices for health care services. Demographic factors are the largest source of variation: Sicker people are costlier to care for and differences in age and gender matter as well. The differential price per unit of health care services is a much bigger deal than differences in the quantity of services rendered.

According to Matthias Rumpf from the OECD,

“…many people in the United States probably think that publicly-owned and operated health care is necessarily unresponsive to people’s wishes and the staff are undermotivated. This can indeed happen, but is far from being the general rule in many OECD countries, who have efficient, well-financed, responsive health care systems — but at much lower cost than in the United States.”

How Can We Control Health Care Costs?

Here are a few things that are common to the higher performing (lower priced) health systems:

1. More emphasis on primary care, to ensure that most care takes place outside of (expensive) hospitals.
2. Encouraging use of (cheaper) generic drugs, when there are alternatives to expensive brands.
3. Adherence to clinical guidelines, so that excessive use of expensive diagnostics or unnecessary health care is prevented
4. Tight regulations of prices and fees, for at least those services that are paid for by public programs.

In the meantime, health insurers have their hands full dealing with the problem of remaining profitable in such an environment, and will have to be innovative to control costs.

In Closing…

Here is an example of one family in which three family members  use about $13,000 worth of the drug Remicade each month for psoriatic arthritis.  Because of a change in the husband’s insurance, the family will have to pay 10 percent of the drug’s cost starting next year – $1,300 per month!  “I don’t know what we’re going to do,” she says.

Tell her to trust in the “free market.”

Sincerely,

The real world

 

Snap principle of health insurance strategy:

The health care insurance industry as we know it is about to undergo big changes

 

Why Health Insurers Are Counting on the Supreme Court to Uphold ObamaCare

The Dilemma of Employer Sponsored Healthcare

As a follow up to my discussion of the Supreme Court’s deliberation on Affordable Health Care Act here, I would like to point to an article by Wendell Potter, who has held a variety of positions at Humana Inc. and CIGNA Corporation, including CIGNA’s head of corporate communications and chief corporate spokesperson.  Mr. Potter points out that:

If there is a group of people more anxious about how the Supreme Court will rule on the health care reform law than President Obama and the millions of Americans who are already benefiting from it, it is health [insurers.]

This provides an invaluable opportunity to reflect on the principles of insurance and how insurance companies can continue to profit and grow in the U.S. One of the dilemmas health insurers face is that some of the primary principles by which businesses become more profitable are not available to them - expansion of services and control of costs.  They have been unable to appreciably bring down the skyrocketing costs of U.S. healthcare and expand coverage. The current model, which excludes certain consumers from coverage only shifts more of the cost of care  to policyholders, increasing the cost burden on both businesses and consumers while reducing the incentive for businesses to purchase employer-sponsored healthcare. And the costs to individuals and small businesses are prohibitive.

Why The Industry Needs The Mandate

Large insurers like Cigna and Aetna grew in the 1990s and 2000s by acquiring smaller competitors. Because of the rising costs and danger of adverse selection in a shrinking pool of consumers, an acquisition strategy is not sufficient to provide increasing quarterly profits to shareholders.  Consequently health insurers are now diversifying by buying data and care management businesses as well as hospitals and physician groups.  The fact is that, without government support, the health insurance business cannot rely solely on free market dynamics to fix the very inefficient U.S. healthcare delivery system.

This is why the industry initially supported President Clinton’s healthcare reform program in the 1990s. Karen Igagni, head of the industry’s largest PR and lobbying group, Health Insurance Plans, testified to a Congressional panel in 1993:

The need for national health care reform has been well documented… Universal coverage at broadly affordable cost becomes possible only when insurance risks are spread across a large community. Currently, most health coverage is priced using “experience rating,” where high premiums are set for high cost groups and low premiums are set for low cost groups. Experience rating financially discriminates against populations that experience high costs: the very young, the very old, the chronically ill, and those with pre-existing conditions, such as diabetes.

Larry English, the former president of Cigna HealthCare, also testified to the committee that he embraced universal coverage and other reforms.  The reforms only lost their support when some of the regulations proposed by the Clintons appeared to have the potential to curtail profits, and the industry endorced “the invisible hand of the market” as the means to bring costs down.

The free-market solution meant that insurers had to keep increasing  premiums and deductibles to keep meeting profit expectations. More restrictive high-deductible plans proved unpopular, an it did not prove a sustainable strategy.

Not a Question of If  - but When and How

Without the individual mandate, the pool of buyers and insurers’ profit margins will continue to shrink. As insureds become increasingly older and morbidity risks increase, premiums will become less affordable. Wendell Potter points out that insurers will have to transform their companies even more rapidly and get out of the risk business sooner rather than later.

The examples of other developed economies illustrate that the basic economics of health care demand government intervention of one kind or another. The questions are simply when and how.

Snap principle of health insurance delivery:

Prepare for sweeping changes

 

Why The Hartford Failed: My Editorial on “Quantitative Myopia”

The Atlantic’s Megan McArdle looks into the real reasons “Why Companies Fail.”  Using GM as a case study, she concludes: “the answer is often culture—the hardest thing of all to change.” I see The Hartford as a case in point.

Business failure is about mismanagement - corporate culture that results in business practices that fail to balance risk with reward and complacency with scale. While short term returns are maximized for the majority shareholders (private equity firms) then there is a strong anti innovation incentive. Rather than innovate, management tinkers to fine tune shareholder equity.

Shareholder-Compliant Culture vs. Sound Business Fundamentals

Private equity firms in the past have targeted 20% returns vs. a public average of 8 – 10%.  That extra margin of 10% return creates pressure on management to focus on rationalizing operations, rather than investing in growth. For The Hartford,  fund manager John Paulson was reportedly pressing for 40 – 60% when he insisted on breaking up The Hartford to maximize the share price.

Management had already been stretching itself thin, making a series of compromising business decisions to satisfy shareholders at the expense of sound business judgement.  Not rocking the shareholder boat had resulted in the abandonment of the fundamentals of running a business,exposing them to increased market risk that came unexpectedly during the market plunge of 2008.

By the fundamentals of running a business, I mean anticipating consumer trends and opportunities, and moving resolutely and soundly to profit from them – encouraging the risks of creativity and innovation, buttressed with proper actuarial assumptions.  But habitual capitulation to shareholder pressure can make it more likely that a company will pursue the production of high profit margin widgets (as with GM’s SUVs), and/or fight to dominate a familiar market niche,  shaving margins without adequate hedging, as Hartford did in its race to add costly, improperly hedged generous living benefits to its Variable Annuity products.

Actuarial and Claims Issues Parallel the ’97 DI Market

Top-down shareholder compliant strategies can result in a slippery slope to a highly leveraged position and extreme sensitivity to market fluctuations, which further erodes profit margins and investment in distribution.  As a result of the losses and potential losses owing to their Variable Annuity living benefit provisions during the 2008 market decline, The Hartford all but discontinued sales of variable annuities, a strategic mistake that resulted in the loss of a distribution system.

Actuarial losses in products that produce periodic claims typically result in companies withdrawing from the market as the result of adverse claims and declining profits. This is what happened with Noncancellable and Guaranteed Renewable Disability Income policies with Own Occupation definitions of disability in the mid 1990s.

The Own Occupation definition of disability was so generous that a surgeon could collect benefits for “gray area claims” -  conditions with self-reported symptoms for which little objective medical data was available to support, including Fibromyalgia, Epstein-Barr Syndrome, Chronic Fatigue Syndrome, Carpal Tunnel Syndrome, and various mental- and nervous disorder-type claims.  As long as they prevented the insured from performing the duties of his own occupation (for example, surgery) but allowed him to keep working (in general practice, for instance)  a specialist could claim full disability benefits equivalent to 70% of average monthly income while continuing to practice medicine. It was a windfall profit for savvy physicians who could effectively double their earnings, but a major loss for Disability Income Insurance (DI) providers. A difficult economy caused by reduced payments under managed care plans helped touch off a spate of claims that DI providers could not sustain.

In response to the financial crisis, many insurance companies exited the disability market, while others consolidated. Three of the nation’s largest - Provident Life and Accident Insurance Company of America, Paul Revere, and Unum Corp—are now one company, UnumProvident, which writes some 40 percent of disability insurance in the country, while a handful of companies now comprise the bulk of the market.

For remaining carriers, benefits were scaled back by tightening eligibility through stricter definitions of disability, and switching to Residual Income policies, which only paid percentage of income lost due to disability.

Synopsis of the Implosion of the DI Market

Here’s an excellent synopsis of the DI market shakeout by Physicians News Digest:

By the mid-1990s, disability insurance companies began to report a large increase in the overall number of disability claims, as well as an increase in the incidence of claims for conditions with self-reported symptoms for which little objective medical data was available to support, according to Tim Mitchell, national sales director for MetLife, which concentrates on group disability writing for large companies. Such “gray area” claims, which Mitchell says continue to escalate, include Fibromyalgia, Epstein-Barr Syndrome, Chronic Fatigue Syndrome, Carpal Tunnel Syndrome, and various mental- and nervous disorder-type claims. Aggravating the trend, Mitchell adds, was an older work force than in the past and the movement of the baby boomer population into the 45 to 55-year-old age bracket, which he says produces the highest incidence of disability claims. Although these claim trends were mirrored by other occupational groups such as attorneys, says Mitchell, insurers’ experience with physician claims was particularly negative during the onset of managed care, says Mitchell. “In the past,” he says, ”physicians with disabilities were so dedicated to their occupation and making so much income that they were willing to work through their disability.” Managed care reduced physician income and increased bureaucratic hassle, he adds, leaving disabled physicians less willing to work through a disability. Perry notes that adverse physician claims experience was particularly acute in the California area, where managed care had a head start on the rest of the country. A less charitable assessment, made by some insurance companies and analysts during the crisis of the mid-1990s, was that managed care had eroded healthy physicians’ work ethic and that many found that they could earn a considerable income by cashing in their generously-written disability policies.

Hartford Suffers The Same Fate

The “quantitative myopia” of The Hartford caused them to build in generous product features that would kick in during a bear market. But it seems they failed to factor in the worst case scenario – that a bear market might actually arrive. The tipping point came in the form of the recent mortgage bubble collapse.

The ones who suffered from this were employees who faced layoffs, and today face massive layoffs since the situation has became so untenable that private equity shareholders have demanded units be spun off.  Paulson wants The Hartford to focus on its more profitable core business to increase shareholder returns 40% to 60%.

Problems of this magnitude often never come to light until the last minute because, as long as influential shareholders are getting a reliable return, they are content to allow the business to manage itself, while, within the organization, there is little incentive to rock the boat, fund innovation, and undertake creative risk tempered by sound risk management.

The Mistake That We are Condemned to Repeat

This is, unfortunately, an inherent flaw in our capitalist model, and one that is difficult to resolve from the inside. Outside in oversight can be established in the form of reserve requirements and such, and government has a role to play in this as the canary in the coal mine.  But government’s role is, of course, reactive rather than proactive, focusing on consumer protection and ethical trade, and the financial integrity of the institution.

The large banks are today fast approaching a point of insustainability that may require private equity firms to eventually break them up as well. But we know historically that if we wait that long, it’s already too late to undo tremendous damage to the broader economy.  At that point there are calls for government bail outs, and the endemic issues of corporate governance are left untouched.

Theodore Roosevelt took an activist approach to trust busting, to break up institutions that overreach, and laws like Glass Steagall were effective protections against the self-destructive cannibalistic policies that resulted from the merger of consumer banking with investment banking. Deregulation and failure to rigorously oversee business practices, including most prominently the trading of derivatives, resulted in a major financial setback resulting in a housing crisis, massive unemployment, ballooning public debt and increased income polarization.

Today, lacking real corporate governance, retail institutions like Walmart have forced suppliers to compete for the lowest possible unit costs, resulting in manufacturing being shipped to China and Bangladesh for 40 cents per hour wages, further eroding economic viability and lowering GDP. All we can do is throw up our hands and say that the answer is to just let the “free market” rein, drill for more oil and frack for gas, simplistic answers that ignore root issues.

You would think that business schools would have trained managers and congress to better understand the fundamentals of running a business.  It appears that government works in much the same way that the private sector does, with large shareholders dictating economic policy. Politicians are for the most part myopic lawyers who are largely ignorant of economic theory and trained to represent paying clients for billable hours (short term profit.) As in the corporate culture, the advice of trained economists is marginalized.

Quantitative myopia means running a business for shareholder gain rather than sustainability and long term profit.  This can be avoided through forward-looking, rigorous business practices that balance the needs of all stakeholders.

Snap principle of sound business management:

Invest in profitable lines of business and control for inevitable volatility.

 

Is World Bank Nominee Jim Yong Kim Right for the Job?

What’s Your Opinion?

Please leave a comment if you would like to weigh in on this question. Does World Bank Head nominee Jim Yong Kim set a high bar for the World Bank, or is he simply unqualified? The sharp divergence of opinion that is bound to make his nomination controversial and heated.  As some line up against him some others, like Paul Krugman, see him as an inspired choice.

My original post on Dr. Kim is here.

Previous World Bank presidents have been mostly former high-profile U.S. government officials with deep international experience. The outgoing president, Robert Zoellick, who will step down in June, was President George W. Bush’s trade representative and deputy secretary of state. He was preceded by Paul Wolfowitz, who was Bush’s deputy secretary of defense. Unlike three of the last four World Bank presidents, Kim’s not a banker. Unlike both of the Bush administration’s picks, he’s not a diplomat or an foreign policy hand. Unlike other named candidates Jeffrey Sachs, Ngozi Okonjo-Iweala and Jose Antonio Ocampo, he’s not an economist or economic policymaker. He has no experience in policy making, economics or development. Kim is a completely new direction for the World Bank.

Does the World Bank Need A New Direction?

Some say the World Bank’s priorities are changing. Development expert Todd Moss explains that  fund recipients India, Vietnam, Ghana, Nigeria and Mongolia will soon be growing their way out of the International Development Association, which primarily serves the world’s poorest countries, and with rising incomes, they will need less help from the bank, and resources will shift to those countries that haven’t been able to take advantage of rising global prosperity. Nearly all of these 30 something low-income nations are fragile, post-conflict zones in Sub-Saharan Africa with needs that are substantially different from those of rapidly developing countries like India.

Kim is primarily known as a force with the global health community. He and Paul Farmer founded the “Partners in Health” organization, which pioneered the delivery of advanced health treatment to deeply rural, impoverished nations such as Haiti. In that world, he’s known as unusually able to bridge the divide between the activist and establishment communities. He moved from Partners in Health to the World Health organization and Dartmouth College, and he managed to keep both constituencies happy.

A Man of Vision and Purpose

Kim’s unconventional career stemmed from  frustration with the medical establishment, which led him to focus on the toughest diseases to treat — AIDS, and tuberculosis in the poorest, hardest-to-reach corners of the world. He needed to battle the prevailing wisdom that it wasn’t worth expending scarce resources to treat those diseases in those areas and efforts would not be successful.  Surgeon and public health researcher Atul Gawande says that Kim and Farmer proved the conventional wisdom wrong on a localized level, and then figured out how to scale that.

Gawande describes Kim as the operational genius of Partners in Health. “He’s sort of a natural executive…Farmer is a saint and a visionary. But Jim could see the vision and turn it into action.”

Kim is capable of pulling off difficult bureaucratic coups too. He persuaded the World Health Organization to reclassify “second-line” tuberculosis drugs as “essential medicines.” Second-line drugs are used when drug-resistant disease foils basic treatments, but were extremely expensive.  Kim made the case to drug companies that the markets could be far larger, particularly if the World Health Organization would reclassify them as “essential drugs,” putting some funding behind them. He also allayed the perception that many in the medical community held that it would be dangerous to distribute these drugs widely. The concern was that distributing the second-line antibiotics would breed resistant strains that no drugs could cure, as some doctors and nurses peddled drugs on black markets, desperate patients sold their antibiotics to buy food, and uneducated pharmacists mixed first-line TB drugs with cough medicine. Kim, using a model developed for the meningococcal vaccine, founded “The Green Light Committee” to serve as the distributor for second-line drugs.  TB programs seeking to take advantage of the lower prices needed to prove to the committee that they had a good plan and directly observed treatment program that wouldn’t breed further resistance.”

By 2000, the costs of the drugs dropped by 90%.  As a result, Kim won a MacArthur genius grant. In 2004, and was named director of the World Health Organization’s HIV/AIDS department, where he ran the “3×5” campaign, which put three million new HIV/AIDS patients in developing countries on antiretroviral drugs by 2007). In 2006. He made Time’s list of the 100 most influential people in the world, and, in 2009, hbecame president of Dartmouth College.

The Wrong Man for the Job?

Still, some in the global development community are expressing concerns that Kim’s experience in world health isn’t necessarily the right experience for his new job. Amanda Glassman, director of global heath at the Center for Global Development, is critical:

“The World Bank is staffed mainly by economists,”Glassman says , “so they have a different view on these questions than a World Health Organization or a UNICEF. Having an economist’s perspective on those issues is important. I wouldn’t want to see the World Bank repeating things done better by other institutions. Their focus on economics and financing is a great one and should be nurtured rather than beaten down.”

William Eastman, a former World Bank economist has voiced a similar concern:

“You have to have the mind-set to allocate scarce funds, rather than approaching the problem as if we have unlimited resources for suffering people. Frankly, I see some danger signs in this kind of pick.”

Lant Pritchett, a tenured professor at Harvard’s Kennedy School of Government who who teaches courses in the practice of international development and worked at the World Bank for 17 years, is sharply blasting Kim’s nomination as “a terrible idea.”  Angola, South Africa and Nigeria have nominated competing candidate, Ngozi Okonjo-Iweala, a woman who was the Nigerian finance minister and a former World Bank official, whom Pritchett insists is much more qualified than Kim.  He points out that the U.S. has less than a 20% share of board votes and though he gives Kim a 60% chance of being appointed, he says that countries like India and China could oppose Kim’s nomination and press for Okonjo-Iweala.

“It’s an embarrassment to the U.S. You cannot with a straight face say this person is the most qualified to lead the World Bank. There is no way you can say with a straight face that this man is more qualified to head the World Bank than Ngozi,” insists Pritchett. Okonjo-Iweala has tackled corruption in Nigeria and because she has worked inside the Bank and as the Bank’s government counterpart in a developing country with complex problems, Pritchett insists she has precisely the kind of experience needed in a World Bank leader. “At best, Kim has worked with ministers of health, but they are in one of many, many government agencies,” says Pritchett. “A minister of finance has to make hard choices across sectors. Having the experience of a minister of finance is the optimal experience for being president of the World Bank.” Adds Pritchett, nominating Kim “is like picking the short stop for the New York Yankees out of the scrub leagues.”

Pritchett points out that the World Bank, whose mission is to reduce global poverty by providing financial resources and sharing expertise with developing nations, works with fragile governments like Pakistan and Afghanistan on complex development issues, from raising tax revenues to elevating GDP to reforming education. Pritchett sees an important distinction between the kind of “charity work” Kim has done, and the complex tasks engaged in by the World Bank.

Related: Here’s a Washington Post article on the pros and cons of having a doctor run the World Bank. And here’s a video of his views on leadership.

Or a Much Needed Change?

Gawande isn’t concerned. “I don’t think this means that health will displace other things,” he says. “In Kim, you have someone coming to the table who has demonstrated through his career that he is fundamentally committed to the question, ‘Do the results change on the ground?’ And he’s not dogmatic about it. He’s the sort of person who will take the criticisms around aid and also take the way it can be empowering and figure out an empirical way forward.” Kim’s nomination has already been endorsed by one leader of a developing country: Paul Kagame, the president of Rwanda.

The World Bank in Perspective

Despite its name, the World Bank not actually a bank, but an international development organization with 187 member countries dedicated to fighting poverty. The bank raises money from its members and sells bonds on international financial markets, using the money to provide low-interest loans to developing countries. Last year, the Work Bank issued $57.3 billion in loans, grants and loan guarantees. It is involved in 1,800 projects, from road maintenance in Vietnam to raising AIDS-prevention awareness in Guinea to helping rebuild Haiti after that country’s devastating 2010 earthquake. From its base in Washington, the World Bank oversees 10,000 employees, including 3,000 outside the United States. Its overseas staff includes engineers, environmental scientists and financial analysts.

The World Bank has dual roles that are contradictory: that of a political organization and that of a practical organization. As a political organization, it must meet the demands of donor and borrowing governments, private capital markets, and other international organizations. As an action-oriented organization, it must be neutral, specializing in development aid, technical assistance, and loans. The World Bank’s obligations to donor countries and private capital markets have caused it to adopt policies which dictate that poverty is best alleviated by the implementation of “market” policies.

Kim’s nomination appears to tilt the organization toward it’s action oriented role, as opposed to it’s political side.  The question is whether he is equipped to handle the complexities of economic theory that have governed the Bank’s policies, and have been highly politicized.

A Political Minefield?

In the 1990s, the World Bank and the IMF forged the Washington Consensus, policies which included deregulation and liberalization of markets, privatization and the downscaling of government. The Washington Consensus has been criticized for ignoring equity, employment and how reforms like privatization are carried out. Many believe that the Washington Consensus placed too much emphasis on the growth of GDP, and not enough on the permanence of growth or on whether growth contributed to better living standards. Some critics also claim that the World Bank has consistently pushed a neoliberal agenda, imposing policies on developing countries which have been damaging, destructive and anti-developmental, and some analysis shows that the World Bank has increased poverty and been detrimental to the environment, public health and cultural diversity.

It has also been suggested that the World Bank is an instrument for the promotion of US or Western interests in certain regions of the world. South American nations have established the Bank of the South in order to reduce US influence in the region. In 2008, a World Bank report which found that biofuels had driven food prices up 75% was not published. Officials confided that they believed it was suppressed to avoid embarrassing the then-President of the United States, George W. Bush.

Critics have argued that the free market reform policies the Bank advocates are often harmful to economic development if implemented too quickly (“shock therapy“), or in the wrong sequence or in weak, uncompetitive economies. In Masters of Illusion: The World Bank and the Poverty of Nations (1996), Catherine Caufield argued that the assumptions and structure of the World Bank harms southern nations.

Some Personal Observations

In conclusion, it’s clear to see why a seasoned political appointee with economic credentials has always served as Bank President. Regardless of who serves, the position will be subject to intense political pressure, and will require hard economic decisions. It appears unlikely that the candidacy of a developing nation nominee would be supported by the Board of Directors, so Kim is likely to win the position.

Kim’s strengths are his activist vision, and ability to handle difficult tasks head on, as well as the ability to take the bank in a new, less politicized direction. For once, the foxes may not be guarding the hen house. He will face a steep learning curve, but he is intelligent, realistic and capable, and appears to be just the outside candidate that is needed at this critical time.

I wonder whether he will exert the influence to steer the Bank from some of its austerity policies toward a more balanced approach. I think it’s worth a shot.

Related articles: 

Why Jim Yong Kim is Obama’s Obvious Choice to Lead the World BankTom PostForbes Staff

Forbes Profile: Jim Yong Kim, Obama’s Nominee To Lead World BankDan BigmanForbes Staff

 

Diversity In Motion: Will Korean American Rapper Head World Bank?

Watch the Video of Jim Yong Kim rapping here.

Surprise Nominee – Meet Dr. DJ Jim Yong Kim

President Barack Obama has nominated Dartmouth College president and global health expert Dr. Jim Yong Kim, age 52, to lead the World Bank. Dr. Kim is a Korean-born physician, born in Seoul, who moved  to the US at the age of five and was raised in Iowa. He has been a pioneer in the treatment of HIV, AIDS and tuberculosis, and has the breadth of experience on development issues needed to carry out the financial institution’s anti-poverty mission.  Dr Kim is a leading figure in global health. Before Dartmouth, he led the global-health and social-medicine department at Harvard Medical School. At the World Health Organization, he focused on helping developing countries improve AIDS treatment and prevention programs. He has also worked on tuberculosis, including efforts to cut the cost of treatment and finding treatments for drug-resistant strains. He also co-founded the health organisation Partners in Health in 1987.

A Rare Personality - J to the K

He also has a personality. Dr. Kim, the first physician to ever serve as head of the school was known for wearing a green tie every day since becoming president of the school in 2009,  and wore a green tie to the White House dinner.  Dr. Kim was the first Asian American to lead an Ivy League school. Mr. Kim was born in Seoul, South Korea, in 1959, and moved with his family to the U.S. at age 5. He grew up in Muscatine, Iowa. He graduated magna cum laude with a B.A. from Brown University in 1982, and then received his M.D. and Ph.D. from Harvard University. He received a MacArthur Fellowship in 2003.

Dr. Kim was also featured in Conan O’Brien’s Dartmouth commencement address  in 2011.

“I would like to thank President Kim for inviting me here today.  … He goes by President Kim and Dr. Kim.  To his friends, he’s Jim Kim, J to the K, Special K, JK Rowling, the Just Kidding Kimster, and most puzzling, ‘Stinky Pete.’ ” Mr. O’Brien then ran through all of Mr. Kim’s achievements, and then asked:  ”Good God, man, what the hell are you compensating for?  Seriously.  We get it; you’re smart.”

More Diverse Representation, More Expertise

The 187-nation World Bank has always been headed by an American. The World Bank and the International Monetary Fund were created at the conference at Bretton Woods in 1944 as a means to regulate trade between nations in the aftermath of the Great Depression and World War II.  It is a  institution that currently fights world poverty and promotes development, and a leading source of development loans for countries seeking financing to build infrastructure projects.

Developing countries, who have long sought to gain more power in the organization, have planned an unprecedented challenge to Obama’s pick and are expected to put forward as many as three other candidates.  In a recent editorial, three former chief economists of the World Bank – Francois Bourguignon, Nicholas Stern and Joseph Stiglitz – argued for an end to the US “monopoly” on running the institution.

Dr. Kim is seen as an unconventional pick that could help to quell criticism in the developing world of the U.S. stranglehold on the international organization’s top post.  Secretary of State Hillary Clinton first recommended that Obama consider Mr. Kim for the World Bank post. President Obama considered more than a dozen candidates, including well-known figures in the administration, but finally pushed for a nominee with broad development experience.  To show how unconventional a pick he is, consider some of the other names rumoured to be under consideration, including former White House adviser Larry Summers, Pepsi head Indra Nooyi, and UN ambassador Susan Rice.

“It’s time for a development professional to lead the world’s largest development agency,” Obama said Friday morning during a Rose Garden ceremony,” President Obama said. ”Jim has truly global experience. He has worked from Asia to Africa to the Americas, from capitals to small villages,” Obama said. “His personal story exemplifies the great diversity to our country.”

In a WSJ Health Blog interview in 2009, Al Mulley, a Dartmouth trustee, said: “It wasn’t so much his medical background that appealed to us, but rather what he has done with his medical background,” He added: “He has used his intellectual inquiry to tackle some of the most complex, vexing problems across the world.”

Challenging a US Monopoly

A US national traditionally heads the World Bank while a European runs the IMF – currently France’s Christine Lagarde.  Emerging economies have become increasingly unhappy with this arrangement and are pushing for change. The vote on the next president is expected to be a formality, but it won’t be uncontested. In a joint statement, Angola, Nigeria and South Africa pledged their support to Ms Okonjo-Iweala. ”The endorsement is in line with the belief that the appointment of the leadership of the World Bank and its sister institution, the International Monetary Fund, should be merit-based, open and transparent,” the statement said.

Speaking at a news conference, Mrs Okonjo-Iweala said: “I consider the World Bank a very important institution for the world, and particularly for developing countries deserving of the best leadership, so I look forward to a contest of very strong candidates. And am I confident? Absolutely.”

US development economist Jeffrey Sachs had also been put forward by several smaller, developing countries and had argued that the World Bank should be led by a development expert.

How the Selection Process Works

The selection will be made next month by the World Bank’s 25-member executive board.  Votes in both the World Bank and the IMF are weighted by financial contribution.  Some member nations have their own seats – the US and UK, for example – while others are grouped into constituencies.  A simple majority is needed to make the selection. The United States, as the world’s largest economy, has the largest percentage (16%) of the votes, and EU countries have a further 29%.  They are likely to support a US-nominated candidate, in order to preserve the long-standing informal deal which has seen the World Bank run by an American and the IMF by a European.

Following Dr Kim’s nomination, Jeffrey Sachs announced his withdrawal from the race. ”Prof Sachs supports Dr Kim 100% and with complete enthusiasm,” his spokeswoman said.

Jim Yong Kim and wife Younsook Lim

A Crowd Pleaser but a Diplomat

Dr. Kim is expected to travel around the world on a listening tour to rally support for his nomination ahead of the board’s vote. He certainly has demonstrated the ability to win over a crowd.  During Dartmouth Idol in 2011, Kim performed the Black Eyed Peas’ “Dirty Bit” version of the song The Time of My Life, rapping, robot-dancing and getting down. However, he does have a commanding diplomatic presence as well, as shown in this photo of him with his wife, Younsook Lim. Overall, Dr. Kim is a well rounded candidate whose contributions to world development and sensibilities as a Korean American tell a compelling personal story -a breath of fresh air.

Related Stories

• World Bank president candidates 23 MARCH 2012, BUSINESS
• Who will take over World Bank? 19 MARCH 2012, BUSINESS
• Sachs bids to head World Bank 18 MARCH 2012, BUSINESS
• Profile: IMF and World Bank 15 FEBRUARY 2012, COUNTRY PROFILES
• Lagarde aims to save global economy 29 FEBRUARY 2012, US & CANADA

 

Everybody’s Talking…The Hartford and the Risks of Variable Annuities

Everybody’s Talking about the Hartford and Variable Annuities

Some questions people may be asking are how this happened, and how it will affect the Variable Annuity industry.

You can read my analysis on the Hartford’s exit from the life and annuities business on March 21 here. Forbes has weighed in now, as well as many other market watchers. Despite the apparent caving to the pressure of hedge-fund manager John Paulson, as the smoke begins to clear, the picture of a perfect storm emerges in 20/20 hindsight.

A Perfect Storm at The Hartford

Buying business through product feature enhancements: It all started when the industry fight over boomer retirement dollars led to  increasingly generous living benefit guarantees. Given the cost of these guarantees and the thin margins of variable annuities, The Hartford became vulnerable during the market collapse of 2008. VAs they sold offered generous living benefits and, in the 2008-09 recession, the cost of providing guarantees and death benefit step-ups caused them to suffer losses, since they were “giving away too much and not charging enough.”  according to one financial advisor. When the market tanked and real account balances dropped, benefits remained guaranteed, putting the company on the hook for large payouts.

Insufficient hedging: It soon became apparent that they hadn’t hedged enough of their exposure. Their share values tumbled, and they cut hundreds of jobs.

Neglecting distribution: Compounding this, the firm pulled back from selling new variable annuities, leading to an outflow of employee talent as annuity wholesalers jumped ship for competitors. Lacking support, financial advisors began to place their business elsewhere. Sterne, Agee & Leach analyst John Nadal says,

“One thing that investors don’t recognize as much as they should is the importance of maintaining distribution…So if your best talent leaves you you’re dead in the water.”

When The Hartford did try to recover with new annuity promotions last year, they had already lost the confidence of the financial advisors who were still wary of how committed the company was to annuities in the long run.

Shareholder activism: Majority shareholder and hedge fund manager John Paulson lost patience with The Hartford and demanded the company divest itself of the unprofitable lines of business. After responding that it would be difficult to spin off these lines of business, The Hartford succumbed to pressure and announced that it would focus on its strong property/casualty business, group-benefits coverage, and its mutual fund operation to concentrate on the “crown jewel” of the company: selling insurance on cars and homes.

More hard decisions to come: It seems to me that The Hartford was telling the truth here – it may be very difficult to divest themselves of their business. Without a viable distributorship, who wants to invest in a losing book of business? To sweeten the deal, they may well have to bundle it with their mutual funds or group business as well.

Growing Public Doubts about Variable Annuities

In the wake of the recent resignation of a Goldman Sachs employee  Greg Smith, whose New York Times op-ed charges that the investment management business had lost its moral compass and was failing to put the best interests of clients first, many critics have emerged to say that financial firms are selling complex products that buyers can’t understand.  let alone profit from them.  Market Watch’s report, “How to avoid becoming a Wall Street muppet” has called for  simplicity, and suggests that investors shy away from  complex, hard-to-understand financial products.

A complex product carries market conduct risk:The Hartford appears to be doing this in dropping their variable annuities line of business. In recent years, as annuities have become increasingly complex, they have gotten bad press and customer complaints have skyrocketed.  To be fair, some of the criticism is unwarrented, as market conduct complaints inevitably rise as returns fall and disillusioned investors lash out with frivolous complaints. But it is true that the complexity of the living benefits are difficult to understand and explain. In the absence of vigilance and the guidance of a financial advisor, it’s easy to make excessive withdrawals that violate the guarantee provisions, voiding guaranteed income guarantees, for instance.

Variable Annuities expose advisors  to risk too: Variable annuities, while designed specifically to mitigate financial risk, expose both clients and advisors to risk.

For example, on Oct. 23, 2011, a 12-person jury found former agent Glenn Neasham, 52, guilty of felony theft  for selling an annuity to an elderly woman.  On Feb. 29, 2012 the judge denied the motion for a new trial, refused to drop the felony charge to a misdemeanor and sentenced Neasham to probation and 300 days in jail. Martin plans to appeal. What did he do that was so egregious? He sold an Allianz MasterDex 10 annuity to an 83-year-old client who, as it turned out, has dementia, although Neasham was not aware of the fact and, according to reports of the trial in the local paper, the client was diagnosed with dementia several years after she purchased the annuity. According to  Life Health Pro:

It appears the jury believed Neasham stole Schuber’s money because her policy had a schedule of surrender charges. Also, they must have thought Neasham, who had no actual knowledge of Schuber’s likely Alzheimer’s, should have known she was suffering from dementia. Her condition has progressively worsened since the annuity sale date — Feb. 6, 2008. She couldn’t testify at trial….It was a perfect storm to punish Glenn Neasham, whose crime was simply selling an annuity.

In an interview, David Saltzman, president of EmpowHR, Inc., in Columbia, S.C., acknowledges he is not privy to all the facts in this particular case, although he says “It seems as though the agent did everything he should have.”  It appears that the annuity actually made money for the policyholder and that the relatives of the woman were consulted before the sale was concluded. Yet the State of California deemed the transaction illegal and charges were brought against the agent.

A miscarriage of justice to be sure, but one that plays to the sympathies of an angry and disillusioned public. California’s legislators have crafted one of the strictest elder abuse laws in the US.

Are Variable Annuities Too Risky?

The Insured Retirement Institute (IRI) reported that net VA sales in the third quarter hit $8.9 billion, a 38 percent rise from the same quarter a year ago and the highest level since 2007.

Yet, in the span of several weeks, even while there has been a rise in variable annuity sales, two large carriers announced their exits from the variable annuities business and another took a large hit on their earnings due to a previous closure of the product line.

• In December, Sun Life announced it was discontinuing sales of VAs in the U.S.
• In the same month, ING reported a $1.1 billion hit to its fourth-quarter earnings due to a VA block of business it closed in the U.S. back in 2009.
• In addition, John Hancock said it was “restructuring” its annuity business saying: “Due to volatile equity markets and the historically low interest rate environment that is expected to continue for an extended period of time, Going forward, our current annuities will be sold only through a narrow group of key partners such as John Hancock Financial Network. John Hancock will continue its award-winning service to its annuity clients, who will see no change in how their accounts are handled.”

Is the sky falling? Not really. Much of this is due to the fact that ING is based in the Netherlands, and John Hancock and Sun Life have Canadian parent companies which,operate under different reserve and reporting requirements. ING must contend with Europe’s Solvency II requirements, which mandate greater capital reserves, according to Cathy Weatherford, president and CEO of the Insured Retirement Institute (IRI) in Washington, D.C. says that carriers are adjusting their product designs to address prevailing market realities. She states:

“We’ve seen significant product retooling over the past three years. We’ve seen significant hedging strategies,” she details. “Many have the ability now to move the money to less volatile fixed incomes if they start seeing market volatility. We know the living benefits aren’t quite as rich as they used to be. They’ve retooled them in a way that they are comfortable with. First and foremost in every insurer’s mind is that they want to be sure they have absolute financial strength so they can perform on the promises they’ve made to policyholders in the products they deliver. “I think each individual carrier makes their own decision based on their own business and distribution models, so I don’t think there is any wholesale answer around this question. But I do believe we are seeing the highest sales since before the meltdown in 2007 this year. So clearly there is available product, and advisors and consumers are gravitating toward them. We have strong carriers who have a robust product suite,” she says. “We’ve seen different strategies with low fees. So I think there are lots of options and opportunities for advisors and consumers.”

Some Thoughts on the Variable Annuity Market

The market remains viable: Health Life Pro says that the departure of the Hartford shouldn’t have much of an effect on the annuities market. Cathy Weatherford has stressed that the insurance industry is strong financially and that lifetime income products continue to meet the needs of the retirees and pre-retirees, particularly baby boomers. And Prudential Annuities said that the company “remains committed to the annuity market, and we are comfortable with our overall risk profile.”

Agents need to do more due diligence: Many advisors don’t seem to think it will impact sales so much. In addition to variable annuities, and many have been diversifying into fixed indexed annuities. Matt Golab, RIA and a licensed insurance agent at Aaron Matthews Financial Resources in Elk Grove, Calif.,says Hartford’s decision has both positive and negative implications for the annuity industry. It’s positive in the sense that a company that may not have been equipped to handle the long-term risk exposure of variable annuities has left the marketplace.On the negative side, one less carrier leaves consumers with fewer choices, and advisors with a tougher job in choosing the right carrier. “It puts a little more work on both the consumer and the advisor to really understand how the insurance company is set up with reserves, how they are taking on risk and what their obligations are for consumers in the future with such things as lifetime income plans and death benefit features, things like that,”

Carriers must better facilitate the sales process : I would add to this that carriers need to do much more to “foolproof variable annuity features by making them easier to understand and more difficult to misunderstand. Fine print disclosures are no longer enough. A concerted effort to educate consumers must be undertaken through better sales collateral and practices.

The potential impact of the Neasham case is a case in point. This case will likely mean a more diligent suitability review when dealing with senior clients due to the possibility of dementia. While most registered representatives are very thorough and consultative in selling variable annuities, suitability will become even more demanding, and may include an evaluation of the client’s medical history going forward, much like the kind of medical questions that you would typically find on a life insurance application.

 

Shareholder Pressure Causes The Hartford to Exit the Life and Annuity Business

Annuity Pioneer Calls it Quits

On March 21, 2012,  The Hartford, (HIG, Fortune 500) one of the oldest companies in the United States with a market valuation of nearly $10 billion, announced that it is exiting the individual annuity business (Press Release here) and will discontinue new annuity sales effective April 27, and expects to take a related after-tax charge of $15 million to $20 million in the second quarter of 2012.

The Hartford is also pursuing the sale or “other strategic alternatives” of its individual life business, one of the 10 biggest in the U.S. as measured by annual premium, its broker-dealer Woodbury Financial Services and its retirement plans unit, which has $52.3 billion under management and is a prominent seller of 401(k) and other employee retirement-savings programs. President and CEO Liam McGee said, ”The Hartford’s sharper focus will lead to an organization that, over time, will be positioned for higher returns on equity, reduced sensitivity to capital markets, a lower cost of capital and increased financial flexibility,” Credit Suisse’s Thomas Gallagher said in a client note that Hartford could get between $2 billion to $3 billion by selling the businesses.

“The actions announced today will allow us to build on our strong financial foundation by concentrating our resources on a smaller number of businesses to position The Hartford for long-term success,” said The Hartford’s Executive Vice President and CFO Christopher J. Swift, executive vice president and chief financial officer. “Individual Life, Woodbury Financial Services and Retirement Plans are strong businesses with distinct market positions and talented employees, but they do not align with our go-forward focus. They will be better positioned for success as part of other organizations. As we have done for more than 200 years, The Hartford will continue to honor its commitments to policyholders and provide a high level of service to its customers. In addition, we will continue to maintain capital resources and financial strength required by our business strategy and consistent with our current ratings.”

CEO Liam McGee has called the property-casualty business the company’s “crown jewel.” The Hartford will also keep its mutual-fund arm, with $85.5 billion in assets under management, and a unit that offers employer-sponsored benefits. Together, the three operations are targeting a return on equity of 12%-13% in 2012, Mr. McGee said. The company wanted to keep all three because each had “a competitive market position against which we believed we can invest to create future profitable growth,” Mr. McGee said. ”The businesses had to be strong generators of capital, not consumers of capital” and will leave Hartford with “lower sensitivity to capital markets than the company does today,” he said.

A video provided by the Wall Street Journal reviews the story.

The Troubled Variable Annuities Business

The Hartford helped pioneer variable annuities, a product that offers a tax-advantaged way of investing in mutual funds. Their product innovations touched off an “arms race” that helped lift industrywide variable-annuity sales to $180 billion by 2007, the peak year, as retirement products became increasingly important. However, annuities have always had a thin margin, and intense product features competition has hurt the business in the past, such as during the tech bubble crash of 2000. During the market free fall of 2008-09, The Hartford suffered big losses, which exposed gaps in the company’s risk-management tools, such as hedging, that it and other annuity providers use. Because The Hartford was smaller than some of its rivals, it was one of the hardest-hit by the turmoil, and its stock lost about 95% of its value at one point in 2008. The company was one of only three insurers that took federal bailout money, which it has since repaid.

In response, The Hartford retreated from the variable annuity business in 2009 as its then-CEO put a team of top aides to work to “de-risk” its offerings to better protect the company’s shareholders, while maintaining enough value in the products that consumers would want to continue buying them. Chief Executive Liam McGee, a former top Bank of America executive, was then brought in to try to turn the company around.

From a top sales spot in the mid 2000s, Hartford finished 2010 in 20th place among leading variable-annuity sellers, and last year it didn’t even make the top-20 chart compiled by industry-funded research firm LIMRA.  Other insurers that have pulled back or exited the variable-annuity business entirely include Sun Life Financial Inc., Genworth Financial Inc. and Massachusetts Mutual Life Insurance Co.

In February, Hartford reported that earnings for its individual annuity business fell to $86 million in the fourth quarter, down from $96 million in the prior-year period. The company’s overall net income plummeted to $127 million in the quarter from $619 million a year earlier. The individual annuity segment had 2011 revenue of $1.84 billion, while total company revenue was $21.86 billion for the year.

Moody’s lowered the outlook of Hartford Life & Annuity Insurance Co., which houses most of the group’s individual annuity business, from stable to negative. It kept the outlook for the parent company, its life subsidiaries and property and casualty insurance subsidiaries at stable.Following a fourth-quarter report last week that missed some Wall Street expectations, analysts said the company was likely to face increased pressure to restructure somehow.

Bowing To A Major Shareholder

The pressure to take action came at the urging of shareholder John Paulson whose hedge fund, Paulson & Co. Inc. owns an 8.5% stake in the company, making it the largest shareholder Although insurers have been on the receiving end of investor outrage before, rarely has it been carried this far. In 2010, hedge fund manager Steve Eisman threatened the management of Genworth Financial on a conference call, saying he would launch a proxy fight unless it improved returns, but he did not follow through on the threat. More recently, the largest shareholder in reinsurer Transatlantic Holdings vetoed a deal with peer Allied World, saying the offer undervalued the company.

Hartford’s announcement comes a little over a month after hedge fund manager and majority shareholder John Paulson publicly demanded on a February 8 conference call with analysts that the company to spin off its property and casualty insurance business, and  break itself into two companies. He said that it could boost Hartford’s value to shareholders by 40% to 60%. He added that breaking up the company would allow management of each new company to focus on what they do best, while making each new company more streamlined.

At that time Hartford said that it would review Paulson’s plan, warning that a breakup wouldn’t be easy.  However, Paulson sharply rejected management’s assertions on insurmountable challenges and said a tax-free spinoff of the property and casualty business would give shareholders as much as 60 percent more value than they are getting now.

“Given the extremely poor performance of Hartford’s stock and the fact that Hartford trades at lower valuation multiples than any of its U.S. insurance peers, addressing these issues should be Hartford’s highest priority,” Paulson wrote in a letter to management. Shares of The Hartford trade at a substantial discount to book value, even more so than their peers in the property insurance sector, and they also trade at a lower price-to-earnings ratio than peers in the life insurance business. Paulson blamed the company’s structure. ”The main, but not the only, reason for Hartford’s low multiple is because the company combines both a Life and a P&C business together,” he said.

Paulson argued that most large multiline insurers have chosen to split off one side of the business or the other, and he said shareholders were “entitled to expect the management and the board to show leadership” on the issue.

Still More To Come?

Paulson said in a statement that it supports The Hartford’s actions as a first step in separating its property and casualty business from its other businesses. However, Hartford’s actions don’t address what Paulson sees as the company’s biggest problem: a property and casualty business tied to complex, unrelated and lower-return businesses that make it less attractive to investors. Credit Suisse’s Thomas Gallagher says while Hartford’s plan doesn’t achieve the legal separation of businesses that Paulson was looking for, it “could very well be the initial step down that path.” The analyst estimates that Hartford’s actions could free up $2.5 billion to $4 billion of capital over the next few years.

Moody’s agrees. “Overall we think the shift in focus toward The Hartford’s stronger property and casualty operations and decision to shut down its highest risk line of business is credit positive; however, given the nature of variable annuity contracts, it will nevertheless take a long time to materially reduce total risk,” Moody’s analyst Paul Bauer said in a statement.

Analyst John Nadel of Sterne, Agee & Leach states, “In discontinuing the sale of individual annuities in the U.S combined with the exit of individual life and retirement plans businesses, the company should be in a position to cut significant costs and run the remaining Life Company at a lower level of capital.” The company also said the changes will give it “reduced sensitivity to capital markets.”

Shares of Hartford jumped 5% following the announcement. The stock has gained more than than 13% since Feb. 8, when John Paulson publicly pushed for a breakup during an earnings conference call. Hartford’s shares rose 27 cents to $21.98 in afternoon trading. The stock has traded between $14.56 and $29.59 in the past year.

“The actions announced today will allow us to build on our strong financial foundation by concentrating our resources on a smaller number of businesses to position Hartford for long-term success,” said chief financial officer Christopher Swift.

A Big Win for Private Equity

This video puts the issue into the larger perspective of activist private equity: mkts_bz_hedge_fund_activists.cnnmoney. According to CNN Money, should a breakup of Hartford continue to unlock shareholder value expected, it would be a rare recent win for Paulson.

Paulson, one of the big winners from the carnage of the financial crisis, has made a series of failed bets over the past year. After betting big on bank stocks, such as Bank of America and Citigroup, Paulson sold those same shares ahead of their recent run-up.

Hartford’s move also signals yet another win this year for activist investors. Companies appear to be increasingly bowing to pressures from hedge fund and other outside investors to make strategic or board changes to increase share value. During this same week, UPS  announced it would buy Dutch shipping company TNT Express for $6.8 billion. Activist investor Jana Partners had been pushing TNT for a sale or a shakeup at the company.

Many investors and analysts expect activism to heat up over the next few months as proxy season gets underway. During proxy season, shareholders have the chance to vote for or against a company’s board of directors and other resolutions. Yahoo is also in the midst of its own battle with activist shareholder Third Point. According to an SEC filing late Tuesday night, Third Point’s Dan Loeb is proposing its own slate of four directors for Yahoo’s board to change the direction of the company.

 

The End of Glass Steagal: Mr Weill Goes to Washington

Here’s an informative  account of Sandy Weill’s creation of the first full-service superbank, Citigroup, and the repeal of the Glass-Steagall Act that stood in his way .

This is from a report by Frontline that discusses the end of Glass Steagal and  interviews of former SEC Chairman Arthur Levitt, former Federal Reserve Board member Alan Blinder, New York State Attorney General Eliot Spitzer, financial historian Charles Geisst, the Precusor Group’s Scott Cleland, and Kenneth Guenther of the Independent Community Bankers of America.

Excerpt: Arthur Levitt,  SEC chairman  from 1993 to 2001:

 ”It was apparent to me that the protections of Glass-Steagall had already largely eroded. But Congress, at several times, nearly passed a bill to do away with Glass-Steagall. It was clear that it was a question not of whether but when Glass-Steagall would go. Millions of dollars were pouring in the campaign coffers of senators and congressmen who were set to do this.”

Excerpt: Kenneth Guenther, President and CEO, Independent Community Bankers of America:

“We are talking about the largest financial merger in the world…for the first time in the modern history of the United States, since 1933, the largest bank, one of the largest securities firms, one of the largest insurance firms, being put together under common ownership.  Here you have the leadership — Sandy Weill of Travelers and John Reed of Citicorp — saying, “Look, the Congress isn’t moving fast enough. Let’s do it on our own.” And so…they get the blessing of the chairman of the Federal Reserve system in early April, when legislation is pending…And they pulled this off with the blessings of the president of the United States, President Clinton; the chairman of the Federal Reserve system, Alan Greenspan; and the secretary of the treasury, Robert Rubin.And then, when it’s all over, what happens? The secretary of the treasury becomes the vice chairman of the emerging Citigroup.”

Good Reading.