The New York Times gave this piece as big a play as you’ll see a non-news story get yesterday, going with a four-line, two-column headline atop page one. That’s newspaper for This Story Is Important.
The Times reports on how states are letting the insurance industry set up so-called captive companies whose sole purpose is to insure the parent insurance company. Why is this a potential problem?
This has given rise to concern that a shadow insurance industry is emerging, with less regulation and more potential debt than policyholders know, raising the possibility that some companies will find themselves without enough money to pay future claims. Critics say this is much like the shadow banking system that contributed to the financial crisis.
To carry the analogy forward, the Times is saying basically that insurers are going regulator-shopping just like banks did in the years leading up to the Crash. The banks pitted the Office of the Comptroller of the Currency against, say, the Office of Thrift Supervision, making the regulators, whose budgets depended on having banks to regulate, try to get their “business.” That led the regulators to compete on who would be the most impotent and to defend banks from bothersome consumers and state regulators who actually wanted to regulate them.
That’s known as regulatory arbitrage, and it’s a key reason why we ended up with the biggest financial crisis in eighty years. It’s nuts that we ever allowed it, and the Dodd-Frank financial reform law changed the rules to prevent it, at least on the federal level.
Another way to think of all this arbitrage is as a race to the bottom. It’s what we mean when we talk about how free-trade fundamentalists are really engaging in labor and environmental arbitrage—pitting the U.S. with its relatively high wages and strong safeguards against third-world countries that have neither. Or when a $90-billion corporation like Amazon blackmails states like Texas and South Carolina that want it to collect sales taxes like everyone else in the state does. Or when a governor famous for his budget cutting gives a Japanese firm $102 million so it won’t move out of the state. Or when companies transfer sales overseas to take advantage of lowball corporate-income shelters. Or when David Stern sends a warning shot to NBA fans and taxpayers by sending the Seattle SuperSonics to Oklahoma City after voters decline to foot the bill for a new arena. Or when Texas Governor Rick Perry tries to take advantage of California cracking down on egregious municipal corruption to poach businesses.
Big banks and Insurance companies are almost indistinguishable. Shady Doins.